Desirable misuse of unemployment benefits: the economics of “Canada Dry” retirement

Helmuth Cremer, Jean-Marie Lozachmeur and Pierre Pestieau

No 2006070, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: The 'Canada Dry' pensions system is in some countries one of the frequent routes to early retirement. It constitutes an informal substitute for early retirement programs. Accordingly, firms lay off aged workers they find costly for what they produce and, to get their support, supplement unemployment benefits by some extra compensation that is paid until formal retirement. Whether the government cannot or does not want to stop these practises is not clear. In this paper we show that these practices may effectively be welfare improving. In other words, it may desirable to tolerate (or even encourage) some 'abusive' uses of unemployment compensation schemes."

Date: 2006-09
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