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Voting on Pensions with Endogenous Retirement Age

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  • Georges Casamatta

    ()

  • Helmuth Cremer

    ()

  • Pierre Pestieau

    ()

Abstract

It is often argued that the observed trend towards early retirement is due mainly to the implicit tax imposed on continued activity of elderly workers. We study the relevance of such a distortion in a political economy model with endogenous age of retirement. The setting is a two-period overlapping generations model. Individuals differ in their productivity. In the first period they work a fixed amount of time; in the second, they choose when to retire and then receive a flat rate pension benefit. Pensions are financed by a payroll tax on earnings in the first and in the second period of life. Such a tax is non distortionary in the first period; it is distortionary in the second period. We allow for some rebating of the second period tax. Individuals vote on the level of the payroll tax given the rebate which can range from 0 (biased system) to 100% (neutral system). We provide sufficient conditions for the existence of a voting equilibrium and study its properties. Under these conditions, high tax rates are supported by all the old and by low productivity young individuals. We show that the pivotal voter is a young individual. The number of young individuals who have higher wage than the pivotal voter equals half the total population. We also show that the introduction of a bias increases the political support for the pension system. Finally, we study the simultaneous determination of the bias and the tax rate through a voting procedure and show that the equilibrium (if any) implies a bias which is always positive and may or not be larger than one. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s10797-005-6392-2
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 12 (2005)
Issue (Month): 1 (January)
Pages: 7-28

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Handle: RePEc:kap:itaxpf:v:12:y:2005:i:1:p:7-28

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: social security; retirement age; majority voting;

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References

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  1. Conde-Ruiz, J. Ignacio & Galasso, Vincenzo, 2004. "The macroeconomics of early retirement," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1849-1869, August.
  2. Tabellini, Guido, 1990. "A Positive Theory of Social Security," CEPR Discussion Papers 394, C.E.P.R. Discussion Papers.
  3. CASAMATTA, Georges & CREMER , Helmuth & PESTIEAU, Pierre, . "The political economy of social security," CORE Discussion Papers RP -1475, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Conde-Ruiz, José Ignacio & Galasso, Vincenzo, 2000. "Early Retirement," CEPR Discussion Papers 2589, C.E.P.R. Discussion Papers.
  5. Francisco M. Lagos & Juan Antonio Lacomba, 2001. "Election On Retirement Age," Working Papers. Serie AD 2001-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  6. Crawford, Vincent P & Lilien, David M, 1981. "Social Security and the Retirement Decision," The Quarterly Journal of Economics, MIT Press, vol. 96(3), pages 505-29, August.
  7. Michele Boldrin & Aldo Rustichini, 2000. "Political Equilibria with Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 41-78, January.
  8. Eytan Sheshinski, 1977. "A Model of Social Security and Retirement Decisions," NBER Working Papers 0187, National Bureau of Economic Research, Inc.
  9. Robert Fenge & Pierre Pestieau, 2005. "Social Security and Early Retirement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262062496, January.
  10. Juan Lacomba & Francisco Lagos, 2007. "Political election on legal retirement age," Social Choice and Welfare, Springer, vol. 29(1), pages 1-17, July.
  11. Gans, Joshua S. & Smart, Michael, 1996. "Majority voting with single-crossing preferences," Journal of Public Economics, Elsevier, vol. 59(2), pages 219-237, February.
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