A Quantitative Investigation of the Laffer Curve on the Continued Work Tax: The French Case

Social Security provisions impose a tax on continued work whereas delaying the retirement age would be favorable for the financial stability of the system. It is often argued that this tax could be removed by implementing actuarially fair schemes. However, by defimtion, actuarially fair benefits cannot help fund the expected Social Security deficit due to demographic changes. This aper proposes to give individuals only a fraction of the marginal actuarially fair incentives in case of postponed retirement. The Social Security then faces a trade off between giving enough incentives to make individuals actually delay retirement and giving little increase in Social Security provisions in order to help finance the expected deficit of the PAYG system. This trade-off is captured by a Laffer curve. This paper proposes to quantify the magnitude of this Laffer curve effect in France. Furthermore, this paper sheds light on the interaction between wealth, altruism and retirement behavior. It reveals that implementing incentives schemes would induce much more heterogeneity in retirement ages. We show that wealth favors early retirement as individuals are rich enough to bear the reduced pension associated with early retirement.