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THE ENDOGENOUS DETERMINATION OF RETIREMENT AGE AND SOCIAL SECURITY BENEFITS

Published online by Cambridge University Press:  03 July 2012

Francisco Cabo  and
Ana García-González
Francisco Cabo*
Affiliation:
IMUVa, University of Valladolid
Ana García-González
Affiliation:
IMUVa, University of Valladolid
*
Address correspondence to: Francisco Cabo, Departamento Economía Aplicada (Matemáticas). Avenida Valle Esgueva 6, 47011 Valladolid, Spain; e-mail: [email protected].
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Abstract

An aging population in modern societies has put stress on public pension systems. To prevent social security deficits from increasing to unbounded levels of public debt we focus on two policies: reducing the generosity of pension benefits, determined by the government, and postponing the effective retirement age, chosen by employees. An atomistic employee would disregard the effect of his retirement decision on the public debt and would retire as soon as possible. Conversely, an ideal farsighted agency considering all current and future employees would postpone retirement, thereby alleviating the pressure on public debt and allowing a more generous long-run pension. The government may design a proper incentive strategy to induce myopic atomistic decision makers to act nonmyopically. This strategy is a two-part incentive with nonlinear dependence on the stock of public debt. It is credible if deceiving employees slightly adjust their retirement-age decisions to increments in the public debt.

Keywords

Public Pension SystemEffective Retirement AgeDifferential GamesCredibility of Incentive Equilibrium
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 1 , January 2014 , pp. 93 - 113
Copyright
Copyright © Cambridge University Press 2012 

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