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Voting on Pensions with Endogenous Retirement Age

Author

Listed:
  • Georges Casamatta

    (GREMAQ - Groupe de recherche en économie mathématique et quantitative - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

  • Helmuth Cremer

    (GREMAQ - Groupe de recherche en économie mathématique et quantitative - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

  • Pierre Pestieau

    (CREPP - Center of Research in Public Economics and Population Economics - ULiège - Université de Liège = University of Liège = Universiteit van Luik = Universität Lüttich, CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain = Catholic University of Louvain, DELTA - Département et Laboratoire d'Economie Théorique et Appliquée - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research)

Abstract

It is often argued that the observed trend towards early retirement is due mainly to the implicit tax imposed on continued activity of elderly workers. We study the relevance of such a distortion in a political economy model with endogenous age of retirement. The setting is a two-period overlapping generations model. Individuals differ in their productivity. In the first period they work a fixed amount of time; in the second, they choose when to retire and then receive a flat rate pension benefit. Pensions are financed by a payroll tax on earnings in the first and in the second period of life. Such a tax is non distortionary in the first period; it is distortionary in the second period. We allow for some rebating of the second period tax. Individuals vote on the level of the payroll tax given the rebate which can range from 0 (biased system) to 100% (neutral system). We provide sufficient conditions for the existence of a voting equilibrium and study its properties. Under these conditions, high tax rates are supported by all the old and by low productivity young individuals. We show that the pivotal voter is a young individual. The number of young individuals who have higher wage than the pivotal voter equals half the total population. We also show that the introduction of a bias increases the political support for the pension system. Finally, we study the simultaneous determination of the bias and the tax rate through a voting procedure and show that the equilibrium (if any) implies a bias which is always positive and may or not be larger than one.

Suggested Citation

  • Georges Casamatta & Helmuth Cremer & Pierre Pestieau, 2005. "Voting on Pensions with Endogenous Retirement Age," Post-Print halshs-00754105, HAL.
    • Handle: RePEc:hal:journl:halshs-00754105
    DOI: 10.1007/s10797-005-6392-2
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    Keywords

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    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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