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Reforming the retirement scheme: Flexible retirement vs. Legal retirement age

  • Juan A. Lacomba

    ()

    (Department of Economic Theory and Economic History, University of Granada.)

  • Francisco M. Lagos

    ()

    (Department of Economic Theory and Economic History, University of Granada.)

We compare a Social Security system where people can retire at the age of their own choice with one in which there is a legal retirement age elected through a majority voting process. We analyze how incentives on retirement decisions change depending on the retirement rules. We show that individuals prefer a legal retirement age higher than that they would choose in the flexible scheme since in this scheme they ignore the impact of their decisions on the Social Security budget constraint. In spite of that, we show that when the legal retirement age significantly limits the retirement age of high-wage workers, a flexible scheme would improve the financing of the pension system. Finally, we show that even when pension benefits are higher with a legal retirement age, a flexible system might be implemented since it would be preferred by a majority of the population composed by low- and high-wage workers.

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File URL: http://www.ugr.es/~teoriahe/RePEc/gra/wpaper/thepapers09_01.pdf
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Paper provided by Department of Economic Theory and Economic History of the University of Granada. in its series ThE Papers with number 09/01.

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Length: 19 pages
Date of creation: 03 Jan 2009
Date of revision:
Handle: RePEc:gra:wpaper:09/01
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  1. Cremer, Helmuth & Pestieau, Pierre, 2003. "The Double Dividend of Postponing Retirement," International Tax and Public Finance, Springer, vol. 10(4), pages 419-34, August.
  2. MICHEL, Philippe & PESTIEAU, Pierre, . "Social security and early retirement in an overlapping-generations growth model," CORE Discussion Papers RP -2624, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Eytan Sheshinski, 1977. "A Model of Social Security and Retirement Decisions," NBER Working Papers 0187, National Bureau of Economic Research, Inc.
  4. Juan Antonio Lacomba & Francisco Miguel Lagos, 2005. "Population Aging and Legal Retirement Age," ThE Papers 05/16, Department of Economic Theory and Economic History of the University of Granada..
  5. CASAMATTA, Georges & CREMER, Helmuth & PESTIEAU, Pierre, 1999. "The political economy of social security," CORE Discussion Papers 1999055, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. John B. Burbidge & A. Leslie Robb, 1980. "Pensions and Retirement Behaviour," Canadian Journal of Economics, Canadian Economics Association, vol. 13(3), pages 421-37, August.
  7. Samwick, Andrew A., 1998. "New evidence on pensions, social security, and the timing of retirement," Journal of Public Economics, Elsevier, vol. 70(2), pages 207-236, November.
  8. Juan Lacomba & Francisco Lagos, 2007. "Political election on legal retirement age," Social Choice and Welfare, Springer, vol. 29(1), pages 1-17, July.
  9. Casamatta, Georges & Cremer, Helmuth & Pestieau, Pierre, 2000. "Political sustainability and the design of social insurance," Journal of Public Economics, Elsevier, vol. 75(3), pages 341-364, March.
  10. 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.
  11. Casamatta, Georges & Cremer, Helmuth & Pestieau, Pierre, 2003. "Voting on Pensions with Endogenous Retirement Age," CEPR Discussion Papers 3778, C.E.P.R. Discussion Papers.
  12. Epple, Dennis & Romano, Richard E, 1996. "Public Provision of Private Goods," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 57-84, February.
  13. 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.
  14. András Simonovits, 2004. "Designing Benefit Rules for Flexible Retirement with or without Redistribution," CESifo Working Paper Series 1370, CESifo Group Munich.
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