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Optimal Design of Pension Rule with Flexible Retirement: The Two-Type Case

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Abstract

We study a model where the government offers two contracts: either low retirement age, low lifetime benefit or high retirement age, high lifetime benefit. Each worker privately knows whether he has a low or high life expectancy and chooses accordingly. The so-called ``actuarially fair'' system – calculated at an average life expectancy – is shown to be not fair: the expectedly shorter-lived subsidize the expectedly longer-lived. Considering optimal design, second-best contracts are separating. Under neutrality, the shorter-lived retire too early with too low a benefit. Under redistribution, the shorter-lived work long enough and receive a high enough benefit to enjoy a higher lifetime utility than under neutrality, although they subsidize the longer-lived.

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Authors and Affiliations

  1. Institute of Economics, Hungarian Academy of Sciences, Budaörsi út 45, Budapest, 1112, Hungary

    András Simonovits

  2. CEU and Budapest University of Technology and Business, Hungary

    András Simonovits

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  1. András Simonovits
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Correspondence to András Simonovits.

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Simonovits, A. Optimal Design of Pension Rule with Flexible Retirement: The Two-Type Case. J Econ 89, 197–222 (2006). https://doi.org/10.1007/s00712-006-0196-4

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  • DOI: https://doi.org/10.1007/s00712-006-0196-4

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