Flexible Retirement and Optimal Taxation

Abdoulaye Ndiaye and Zhixiu Yu

No 20322, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Raising the retirement age is a common policy response when social security schemes face fiscal pressures. We develop and estimate a dynamic life cycle model to study optimal retirement and tax policy when individuals face health shocks and income risk and make endogenous retirement decisions. The model distinguishes three channels through which health affects retirement: nonconvexities in labor supply due to healthdependent fixed costs of working, earnings reductions, and mortality risk. Labor supply nonconvexities make labor supply elasticities endogenous and reverse the standard prediction that optimal labor wedges rise with age: Labor wedges eventually decline as hours fall with worker age and poor health. Mortality risk similarly overturns the standard positive savings distortion, making it optimal to subsidize savings. We estimate the model to match US microdata and compute the constrained-efficient allocation. In the optimum, labor wedges are hump-shaped, and lower for workers in poor health; retirement consumption increases with the claiming age more steeply than does the benefits top-up under the social security delayed retirement credit; and retirement savings is increasingly subsidized with worker age and poor health. These findings support flexible retirement policies rewarding delayed retirement while accommodating heterogeneity in health rather than uniform increases in the retirement age.

JEL-codes: D15 H21 H55 J26 (search for similar items in EconPapers)
Date: 2025-06
New Economics Papers: this item is included in nep-age, nep-dge and nep-pbe
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Related works:
Working Paper: Flexible Retirement and Optimal Taxation (2025)
Working Paper: Flexible Retirement and Optimal Taxation (2025)
Working Paper: Flexible Retirement and Optimal Taxation (2020)
Working Paper: Flexible Retirement and Optimal Taxation (2018)
Working Paper: Flexible Retirement and Optimal Taxation (2017)
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