Working Paper: CEPR ID: DP18345
Authors: Sebastian Graves; Victoria Gregory; Lars Ljungqvist; Thomas Sargent
Abstract: We incorporate time-averaging into the canonical model of Heckman, Lochner, and Taber (1998) (HLT) to study retirement decisions, government policies, and their interaction with the aggregate labor supply elasticity. The HLT model forced all agents to retire at age 65, while our model allows them to choose career lengths. A benchmark social security system puts all of our workers at corner solutions of their career-length choice problems and lets our model reproduce HLT model outcomes. But alternative tax and social security arrangements dislodge some agents from those corners, bringing associated changes in equilibrium prices and human capital accumulation decisions. A reform that links social security benefits to age but not to employment status eliminates the implicit tax on working beyond 65. High taxes with revenues returned lump-sum keep agents off corner solutions, raising the aggregate labor supply elasticity and threatening to bring about a "dual labor market" in which many people decide not to supply labor.
Keywords: Laffer Curve; Time Averaging; Labor Supply Elasticity; Retirement; Taxation; Social Security Reform
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| time-averaging framework (C22) | increase in aggregate labor supply elasticity (J49) |
| social security reform permits benefits after age 65 (H55) | eliminates implicit tax on working beyond age 65 (J26) |
| eliminates implicit tax on working beyond age 65 (J26) | encourages longer working careers (J26) |
| social security reform (H55) | high school workers increase lengths by 2.4 years (J24) |
| social security reform (H55) | college-educated workers increase lengths by 7.6 years (J24) |
| high taxes with revenues returned as lump-sum transfers (H29) | keeps agents off corner solutions (C78) |
| keeps agents off corner solutions (C78) | raises aggregate labor supply elasticity (J49) |
| raises aggregate labor supply elasticity (J49) | potentially leads to a dual labor market (J42) |