Designing benefit rules for flexible retirement: Welfare vs. redistribution

P. Eső (), Andras Simonovits () and J. Tóth ()
Additional contact information
P. Eső: Oxford University, Oxford, UK
J. Tóth: Budapest University of Technology and Economics, Budapest, Hungary

Acta Oeconomica, 2011, vol. 61, issue 1, 3-32

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.

Keywords: flexible retirement; asymmetric information; actuarial fairness; redistribution; mechanism design (search for similar items in EconPapers)
JEL-codes: C61 C63 D82 D91 H55 (search for similar items in EconPapers)
Date: 2011
Note: This work is a revision of a discussion paper by Esõ – Simonovits (2002). We express our debt to persons – sometimes anonymous – commenting the previous versions of the paper and related papers, especially Rudolf Borlói, Péter Alács, Nicholas Barr, Peter Diamond, late László Hablicsek, János Kornai, Judit Marosi, János Vincze and Thomas Weitzenblum. András Simonovits and János Tóth acknowledge the financial support of the Hungarian Scientific Research Fund (OTKA) K 81483 and NK 63066, respectively.
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