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Social Desirability of Earnings Tests

  • Helmuth Cremer
  • Jean-Marie Lozachmeur
  • Pierre Pestieau

In many countries, pension systems involve some form of earnings test; i.e. an individual's benefits are reduced if he has labor income. This paper examines whether or not such earnings tests emerge when pension system and income tax are optimally designed. We use a simple model with individuals differing both in productivity and in their health status. The working life of an individual has two 'endings': an official retirement age at which he starts drawing pension benefits (while possibly supplementing them with some labor income) and an effective age of retirement at which professional activity is completely given up. Weekly work time is endogenous, but constant in the period before official retirement and again constant (but possibly at a different level), after official retirement. Earnings tests mean that earnings are subject to a higher tax after official retirement than before. We show under which conditions earnings tests emerge both under a linear and under a non-linear tax scheme. In particular, we show that earnings tests will occur if heterogeneities in health or productivity are more significant after official retirement than before. Copyright 2008 The Authors.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0475.2008.00427.x
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Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 9 (2008)
Issue (Month): (05)
Pages: 114-134

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Handle: RePEc:bla:germec:v:9:y:2008:i::p:114-134
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  1. Robert Fenge & Pierre Pestieau, 2005. "Social Security and Early Retirement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262062496, June.
  2. Leora Friedberg, 2000. "The Labor Supply Effects of the Social Security Earnings Test," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 48-63, February.
  3. Alan L. Gustman & Thomas L. Steinmeier, 2004. "The social Security Retirement Earnings Test, Retirement and Benefit Claiming," NBER Working Papers 10905, National Bureau of Economic Research, Inc.
  4. Cremer, Helmuth & Lozachmeur, Jean-Marie & Pestieau, Pierre, 2004. "Social security, retirement age and optimal income taxation," Journal of Public Economics, Elsevier, vol. 88(11), pages 2259-2281, September.
  5. Richard Disney & Sarah Smith, 2002. "The Labour Supply Effect of the Abolition of the Earnings Rule for Older Workers in the United Kingdom," CeRP Working Papers 17, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  6. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
  7. Michele Boldrin & Juan J. Dolado & Juan F. Jimeno & Franco Peracchi, 1999. "The future of pensions in Europe," Economic Policy, CEPR;CES;MSH, vol. 14(29), pages 287-320, October.
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