The Role of Income Effects in Early Retirement

ECONPUBBLICA Working Paper No. 158

32 Pages Posted: 1 Mar 2012

See all articles by J. Ignacio Conde-Ruiz

J. Ignacio Conde-Ruiz

Foundation for Applied Economic Research (FEDEA)

Vincenzo Galasso

University of Lugano; Centre for Economic Policy Research (CEPR)

Paola Profeta

Bocconi University - Department of Policy Analysis and Public Management; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 1, 2011

Abstract

We provide a long term perspective on the individual retirement behavior and on the future of retirement by emphasizing the role of (negative) income effects. We consider a political economic theoretical framework, with actuarial "fair" and "unfair" early retirement schemes, and derive a political equilibrium with positive social security contribution rates and early retirement. A reduction in the wages in youth, consistent with the recent labor market trends since the massive introduction of temporary jobs, induces workers to postpone retirement, and — in the "unfair" system — leads to lower contribution rates. A reduction in the growth rate of the economy has opposite effects on the retirement decisions, leading — in the "unfair" system — to more early retirement. Aging induces a negative income effect, but has also an opposite political effects on social security contributions and retirement decisions. For an actuarial "fair" social security system, we provide conditions for the political effect to dominate; in an "unfair" scheme, numerical simulations confirm a slight predominance of the political effect, as contribution rates increase. These results may shed some light on the future of early retirement in aging societies.

Keywords: pensions, income effect, tax burden, politico-economic

JEL Classification: H53, H55, D72

Suggested Citation

Conde-Ruiz, J. Ignacio and Galasso, Vincenzo and Profeta, Paola, The Role of Income Effects in Early Retirement (June 1, 2011). ECONPUBBLICA Working Paper No. 158. Available at SSRN: https://ssrn.com/abstract=2014025 or http://dx.doi.org/10.2139/ssrn.2014025

J. Ignacio Conde-Ruiz (Contact Author)

Foundation for Applied Economic Research (FEDEA) ( email )

Jorge Juan 46
Madrid, 28001
Spain
+34 91 435 9020 (Phone)
+34 91 577 9575 (Fax)

Vincenzo Galasso

University of Lugano ( email )

Via Giuseppe Buffi 13
Lugano, 6900
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Paola Profeta

Bocconi University - Department of Policy Analysis and Public Management ( email )

Via Roentgen 1
Milan, 20136
Italy

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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