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Flexible Retirement and Optimal Taxation

Abdoulaye Ndiaye ()
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Abdoulaye Ndiaye: Federal Reserve Bank of Chicago

No WP-2018-18, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: This paper studies optimal insurance against private idiosyncratic shocks in a life-cycle model with intensive labor supply and endogenous retirement. In this environment, the optimal labor tax is hump-shaped in age: insurance benefits of taxation push for increasing-in-age taxes while rising labor supply elasticities and optimal late retirement of highly productive workers push for lowering taxes for old workers. In calibrated numerical simulations, the optimum achieves sizable welfare gains that age-dependent taxes do not deliver under the status quo US Social Security. Nevertheless, an optimal combination of age-dependent linear taxes with increasing-in-age retirement benefits generates welfare gains close to optimal.

Keywords: Retirement; Optimal Taxation; Social Security; Continuous- Time; Optimal Stopping (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-age, nep-cmp, nep-dge, nep-ias and nep-pbe
Date: 2017-11-03, Revised 2018-11-05
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DOI: 10.21033/wp-2018-18

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