"Incentives and Efficiency of Pension Systems", working paper

Abstract:

We study efficiency and incentive costs of social insurance and redistribution when retirement is endogenous. We characterize Pareto optima, show the forces determining optimal retirement ages, and derive the properties of optimal retirement distortions. It is optimal for a pension system to reward later retirement independent of whether efficient retirement ages increase or decrease in productivity. When individual heterogeneity and the parameters of status-quo policies are calibrated to U.S. income taxes, Social Security, individual earnings, hours, and retirement ages, optimal pensions generate not only significant welfare gains but also aggregate output gains.