Strotz (1956) first suggested that individuals are more impatient when making short-run tradeoffs than long-run ones. Many experimental studies supports his conjecture. Motivated by recent evidence from the British Department of Work and Pension (2006), this paper applies this behavioral framework to retirement decisions. We propose a three-periods OLG model with quasi-hyperbolic consumers whosave for post retirement consumption in the first period and choose their retirement age in the second. We show that this behavioral assumption explains the observed drop in post retirement consumptiondue to lack of saving and the high level of voluntary (i.e. not due to disability or dismission from the firm) early exit from the labor force. When deciding about their retirement age, workers weight too much the costs of remaining at work (i.e. disutility of working, implicit tax on continued activity) and too little the benefits of postponed retirement (i.e. increase of the Bismarckian component of the pension formula), perceived as too far in the future. We investigate the implications of time inconsistent preferences for a political economy model in which voters determine simultaneously thesize and the degree of redistribution of the pension system. We show that, when voting over thepayroll tax, time inconsistent young workers, who look for a commitment device that increases boththeir saving and retirement age, form a coalition with rich in order to decrease the size of the system. When voting over the degree of redistribution, they form a coalition with poor individuals as to in-crease the at part of the pension formula. Our political model provides a political justification for the negative relationship between size and redistribution observed in most OECD countries (Disney 2004).
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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number
205.
Find related papers by JEL classification: A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
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J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2003.
"Early Retirement,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 12-36, January.
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