Social Desirability of Earning Tests

Helmuth Cremer (), Lozachmeur, Jean-Marie and Pierre Pestieau ()

No 5551, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In many countries pension systems involve some form of earnings test; i.e., an individual’s benefits are reduced if he has labour income. This paper examines whether or not such earning tests emerge when pension system and income tax are optimally designed. We use a simple model with individuals differing both in productivity and their health status. The working life of an individual has two 'endings': an official retirement age at which he starts drawing pension benefits (while possibly supplementing them with some labour income) and an effective age of retirement at which professional activity is completely given up. Weekly work time is endogenous, but constant in the period before official retirement and again constant (but possibly at a different level), after official retirement. Earnings tests mean that earnings are subject to a higher tax after official retirement than before. We show under which conditions earnings tests emerge both under a linear and under a nonlinear tax scheme. In particular, we show that earning tests will occur if heterogeneities in health or productivity are more significant after official retirement than before.

Keywords: earnings test; social security (search for similar items in EconPapers)
JEL-codes: H21 H55 J26 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe
Date: Written
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Related works:
Working Paper: Social desirability of earnings tests (2006)
Journal Article: Social Desirability of Earnings Tests (2008)
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