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Social security and retirement decision: a positive and normative approach

  • CREMER, Helmuth
  • LOZACHMEUR, Jean-Marie
  • PESTIEAU, Pierre

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.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006019.

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Date of creation: 00 Feb 2006
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Handle: RePEc:cor:louvco:2006019
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  1. CREMER, Helmuth & LOZACHMEUR, Jean-Marie & PESTIEAU, Pierre, . "Optimal retirements and disability benefits with audit," CORE Discussion Papers RP -1836, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Cremer, Helmuth & Lozachmeur, Jean-Marie & Pestieau, Pierre, 2004. "Retirement Age and Health Expenditures," IDEI Working Papers 306, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Mikhail Golosov & Aleh Tsyvinski, 2006. "Designing Optimal Disability Insurance: A Case for Asset Testing," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 257-279, April.
  4. Conde-Ruiz, J.I. & Galasso, V., 2000. "Early Retirement," Economics Working Papers eco2000/24, European University Institute.
  5. Georges Casamatta & Helmuth Cremer & Pierre Pestieau, 2005. "Voting on Pensions with Endogenous Retirement Age," International Tax and Public Finance, Springer, vol. 12(1), pages 7-28, January.
  6. PESTIEAU, Pierre, . "Are we retiring too early?," CORE Discussion Papers RP -1550, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. J. Ignacio Conde-Ruiz & Vincenzo Galasso, . "The Macroeconomic of Early Retirement," Working Papers 194, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  8. Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, number grub99-1, August.
  9. Diamond, Peter A & Mirrlees, James A, 1986. " Payroll-Tax Financed Social Insurance with Variable Retirement," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 25-50.
  10. Sveinbjörn Blöndal & Stefano Scarpetta, 1999. "The Retirement Decision in OECD Countries," OECD Economics Department Working Papers 202, OECD Publishing.
  11. CASAMATTA, Georges & CREMER, Helmuth & PESTIEAU, Pierre, . "Is there a political support for the double burden on prolonged activity?," CORE Discussion Papers RP -1865, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. CREMER, Helmuth & PESTIEAU, Pierre, . "The double dividend of postponing retirement," CORE Discussion Papers RP -1696, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  13. J. A. Mirrlees & P. Diamond, 1982. "Social Insurance with Variable Retirement and Private Saving," Working papers 296, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
  15. Jonathan Gruber & David Wise, 2005. "Social Security Programs and Retirement around the World: Fiscal Implications, Introduction and Summary," NBER Working Papers 11290, National Bureau of Economic Research, Inc.
  16. Parsons, Donald O., 1996. "Imperfect 'tagging' in social insurance programs," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 183-207, October.
  17. CREMER, Helmuth & LOZACHMEUR, Jean-Marie & PESTIEAU, Pierre, . "Disability testing and retirement," CORE Discussion Papers RP -1904, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  18. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 297-302, July.
  19. Helmuth Cremer & Jean-Marie Lozachmeur & Pierre Pestieau, 2002. "Social Security, Retirement Age and Optimal Income Taxation," CESifo Working Paper Series 693, CESifo Group Munich.
  20. Robert Fenge & Pierre Pestieau, 2005. "Social Security and Early Retirement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262062496, June.
  21. Jonathan Gruber & Kevin Milligan & David A. Wise, 2009. "Social Security Programs and Retirement Around the World: The Relationship to Youth Employment, Introduction and Summary," NBER Working Papers 14647, National Bureau of Economic Research, Inc.
  22. Sheshinski, E. & Diamond, P., 1992. "Economic Aspects of Optimal Disability Benefits," Working papers 92-5, Massachusetts Institute of Technology (MIT), Department of Economics.
  23. Diamond, P. A. & Mirrlees, J. A., 1978. "A model of social insurance with variable retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 295-336, December.
  24. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
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