"Incentives and Efficiency of Pension Systems", working paper, January 2017

Abstract:
We study tensions between efficiency and incentive costs of social insurance in a life-cycle framework with retirement. Individual heterogeneity and the parameters of status quo policies are estimated from U.S. income taxes, Social Security, individual earnings, hours, and retirement ages data. An equivalence result provides a simple way to characterize the effects of constrained-efficient tax and pension systems and to evaluate how behavior and welfare are impacted. We derive and estimate a sufficient statistic for efficient retirement ages to increase or decrease in productivity. We show that efficient pension systems reward later retirement independent of increasing or decreasing patterns of retirement ages. Providing higher productivity with incentives for later retirement generates not only significant welfare gains but also output gains.