Designing benefit rules for flexible retirement: Welfare vs. redistribution

Eső, P. and Simonovits, A. and Tóth, J. (2011) Designing benefit rules for flexible retirement: Welfare vs. redistribution. Acta Oeconomica, 61 (1). pp. 3-32. ISSN 0001-6373

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Abstract

With flexible (variable) retirement every individual determines his optimal retirement age, depending on a common benefit-retirement age schedule and his life expectancy. The government maximises the average expected lifetime utility minus a scalar multiple of the variance of the lifetime pension balances to achieve harmony between the maximisation of welfare and the minimisation of redistribution. Since the government cannot identify types by life expectancy, it must take the individual incentive compatibility constraints into account. Second-best schedules strongly reduce the variances of benefits and of retirement ages of the so-called actuarially fair system, thus achieving higher social welfare and lower redistribution.

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