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Retirement and Social Security: A Political Economy Perspective

  • Ryo Arawatari


    (Faculty of Economics, Shinshu University)

  • Tetsuo Ono


    (Graduate School of Economics, Osaka University)

Countries with higher implicit taxes on continued work are associated with lower labor force participation rates of the elderly. This paper constructs a politicoeconomic model that accounts for this feature based on multiple, self-fulfilling expectations of agents. In this model, agents are identical at birth and can become skilled (or remain unskilled) through educational investment. When agents hold expectations of higher future taxation (i.e., higher social security benefits), it provides a disincentive to engage in educational investment, thereby resulting in an unskilled majority. In turn, this unskilled majority supports higher taxation, which induces the retirement of the elderly and thus results in a lower labor force participation rate. The opposite applies when agents have expectations of lower taxes in their old age.

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Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 10-04.

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Length: 34 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:osk:wpaper:1004
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  1. Grossman, G.M. & Helpman, E., 1996. "Intergenerational Redistribution with Short-Lived Governments," Papers 178, Princeton, Woodrow Wilson School - Public and International Affairs.
  2. Casamatta, Georges & Cremer, Helmuth & Pestieau, Pierre, 2004. "Is there a Political Support for the Double Burden on Prolonged Activity?," IDEI Working Papers 315, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Casamatta, Georges & Cremer, Helmuth & Pestieau, Pierre, 2003. "Voting on Pensions with Endogenous Retirement Age," CEPR Discussion Papers 3778, C.E.P.R. Discussion Papers.
  4. 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.
  5. Hassler, John & Storesletten, Kjetil & Zilibotti, Fabrizio, 2003. "Democratic Public Good Provision," CEPR Discussion Papers 4044, C.E.P.R. Discussion Papers.
  6. repec:fda:fdaddt:2005-03 is not listed on IDEAS
  7. Conde-Ruiz, J. Ignacio & Galasso, Vincenzo, 2004. "The macroeconomics of early retirement," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1849-1869, August.
  8. Conde-Ruiz, J.I. & Galasso, V., 2000. "Early Retirement," Economics Working Papers eco2000/24, European University Institute.
  9. Juan Antonio Lacomba & Francisco Miguel Lagos, 2005. "Political Election on Legal Retirement Age," ThE Papers 05/10, Department of Economic Theory and Economic History of the University of Granada..
  10. Azariadis, Costas & Galasso, Vincenzo, 2002. "Fiscal Constitutions," Journal of Economic Theory, Elsevier, vol. 103(2), pages 255-281, April.
  11. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
    • Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  12. John Hassler & José V. Rodríguez Mora & Kjetil Storesletten & Fabrizio Zilibotti, 2003. "The Survival of the Welfare State," American Economic Review, American Economic Association, vol. 93(1), pages 87-112, March.
  13. Galasso, Vincenzo, 2008. "Postponing retirement: the political effect of aging," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2157-2169, October.
  14. Juan Lacomba & Francisco Lagos, 2006. "Population aging and legal retirement age," Journal of Population Economics, Springer, vol. 19(3), pages 507-519, July.
  15. repec:fda:fdaddt:2003-03 is not listed on IDEAS
  16. Eytan Sheshinski, 1977. "A Model of Social Security and Retirement Decisions," NBER Working Papers 0187, National Bureau of Economic Research, Inc.
  17. James P. Smith, 1999. "Healthy Bodies and Thick Wallets: The Dual Relation between Health and Economic Status," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 145-166, Spring.
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