Acturial Adjustment Aspects of Public Pension Schemes

Kamil Galuscak

Labor and Demography from University Library of Munich, Germany

Abstract: It has been shown in economic research that public pay-as-you-go defined-benefit pension plans penalize those who continue to work beyond a certain age by reducing the present discounted value of future retirement benefits. In discussions on the effectiveness of policies aimed at eliminating this age-dependency in worker retirement decisions, it is often assumed either that the benefits in all future periods have the same weight in the present discounted value or that the discount rate is close to unity due to low real interest rates used in this case. In this paper we show, using the example of the U.S. pension scheme, that discounting plays a crucial role, since the formula for the present discounted value of future retirement benefits is sensitive to the discount rate used. Using discount rates derived from real interest rates in 1997, we find that the annual delayed retirement credit by which retirement benefits should be increased to compensate for lost benefits is at least 25% greater than it is in the case when discounting is neglected. Moreover when accouting for risk aversion towards lifetime uncertainty, the optimal delayed retirement credit is increased by 15- 25%. Our results indicate that the U.S. pension scheme is not age neutral between ages 62 and 65. This may explain the peak in labor force withdrawal observed at age 62.

Keywords: public pensions; defined-benefit pension plans; U.S. pension scheme; actuarial adjustment; delayed retirement credit; discounting; lifetime uncertainty; risk aversion (search for similar items in EconPapers)
JEL-codes: D80 H55 J22 J26 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2001-03-30
New Economics Papers: this item is included in nep-ias
Note: Type of Document - Acrobat PDF; pages: 35 ; figures: Included
References: Add references at CitEc
Citations:

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/lab/papers/0103/0103001.pdf (application/pdf)

Related works:
Working Paper: Acturial Adjustment Aspects of Public Pension Schemes (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpla:0103001

Access Statistics for this paper

More papers in Labor and Demography from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).