Working Paper: CEPR ID: DP5542
Authors: Helmuth Cremer; Jean-Marie Lozachmeur; Pierre Pestieau
Abstract: Social insurance for the elderly is judged responsible for the widely observed trend towards early retirement. In a world of laissez-faire or in a first-best setting, there would be no such trend. However, when first-best instruments are not available, because health and productivity are not observable, the optimal social insurance policy may imply a distortion on the retirement decision. The main point we make is that while there is no doubt that retirement systems induce an excessive bias towards early in many countries, a complete elimination of this bias (i.e., a switch to an actuarially fair system) is not the right answer. This is so and for two reasons. First, some distortions are second-best optimal. This is the normative argument. Second, and on the positive side, the elimination of the bias might be problematic from a political perspective. Depending on the political process, it may either not be feasible or alternatively it may tend to undermine the political support for the pension system itself.
Keywords: early retirement; majority voting; optimal income taxation; social security
JEL Codes: H21; H55; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| social security systems (H55) | early retirement (J26) |
| early retirement (J26) | political support for pension systems (H55) |
| social security incentives (H55) | retirement age (J26) |
| aging population (J14) | retirement age (J26) |
| retirement age (J26) | labor force participation (J22) |
| social insurance policies (H55) | distortions in retirement decisions (J26) |
| political process (D72) | retirement age decisions (J26) |