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Choosing the legal retirement age in presence of unemployment*

Published online by Cambridge University Press:  09 January 2015

Georges Casamatta  and
Caroline De Paoli
Georges Casamatta
Affiliation:
Toulouse School of Economics (GREMAQ-CNRS and CEPR); email: [email protected]
Caroline De Paoli
Affiliation:
ISG and Paris School of Economics (INRA)
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Summary

A general conclusion of the theoretical literature on pensions is, confronted to an increased longevity, to encourage continued activity. This literature however assumes a perfect labour market. The central question addressed in this article is whether it is still desirable to increase the retirement age when individuals face the risk of being unemployed.

In this purpose, we study the design of the P ay-As-You-Go pension system, focusing on the determination of the retirement age, in a model where people differ according to age only and face in every period a given probability of becoming unemployed.

We first determine the optimal pension system, which consists in a payroll tax rate, a pension benefit level and a retirement age and study its comparative statics with respect to a change of the unemployment rate and the length of life. Our main findings are the following. First, it is optimal to postpone retirement when life expectancy increases. Second, when unemployment benefits are low the optimal retirement age may decrease with the unemployment rate.

We then characterize the issue-by-issue voting equilibrium and compare it to the optimal pension scheme. It is shown that the median voter in general chooses a retirement age lower than the optimal one as well as a higher payroll tax rate.

Résumé

Résumé

La littérature théorique sur les retraites conclut que, dans une situation où la longévité augmente, les individus devraient travailler plus longtemps. Dans cette article, nous cherchons à déterminer si cette conclusion est toujours valide lorsque les individus font face au risque de chômage. Dans cette optique, nous étudions le choix du système de retraite par répartition, en mettant l'accent sur l’âge de départ en retraite, dans un modèle où les individus diffèrent par leur âge seulement et font face au risque de chômage. Nous déterminons dans un premier temps le système de retraite optimal, ce système étant caractérisé par le taux de cotisation, le niveau de prestation et l’âge de la retraite et nous étudions la statique comparative par rapport au taux de chômage et la durée de vie. Nos résultats principaux sont les suivants. Tout d'abord, il est optimal de différer l’âge de la retraite lorsque la durée de vie augmente. Ensuite, nous trouvons que l’âge de la retraite optimal peut diminuer lorsque le risque de chômage augmente. Nous caractérisons enfin l’èqui-lilibre de vote et le comparons avec le système optimal. Nous montrons que l’électeur médian choisit en général un âge de la retraite inférieur àl’âge optimal ainsi qu'un taux de cotisation plus important.

Keywords

retirement ageunemploymentH55système de retraitechômageéquilibre politiqueâge de départ à la retraiteH55
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 78 , Issue 1 , March 2012 , pp. 5 - 25
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2012 

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Footnotes

*

This research has benefitted from the financial support of the AN R “Retraite” (ANR-05-BLAN-0020). We thank Peter Diamond for a useful discussion as well as seminar participants at university of Cergy-Pontoise (THEMA) and Paris School of Economics (INRA).

References

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