Employment, Leisure and Pension: Incentives with Limits

Central European University Working Paper No. 3/2001

17 Pages Posted: 27 May 2001

See all articles by András Simonovits

András Simonovits

Hungarian Academy of Sciences (HAS) - Research Centre for Economic and Regional Studies (HAS)

Date Written: March 15, 2001

Abstract

This paper considers two characteristics of a public pension system: the contribution rate and the lenght of employment. A simple family of optimization models is set up, where the instantaneous utility is a Cobb-Douglas-function of consumption and leisure, futhermore, the life-time utility is a CES-function of the instantaneous utility. We assume that at every instant the individual either works with full capacity or does not work at all. Furthermore, the individuals' parameter values (e.g. of the elasticity of utility with respect to consumption and the expected life span) differ from the government's ones. First the government calculates its optimal contribution rate and length of employment. That optimal rate is to be paid by the individuals but each can choose how many years he works-for a "proportional" benefit. Since government's actuaries calculate with the average life expectancy, people, correctly expecting to live longer/shorter than average, receive then more/less than they would deserve. This unfairness can only be mitigated by dampened incentives.

Keywords: flexible retirement, asymmetric information, actuarial fairness

JEL Classification: D82, D91, H55

Suggested Citation

Simonovits, András, Employment, Leisure and Pension: Incentives with Limits (March 15, 2001). Central European University Working Paper No. 3/2001. Available at SSRN: https://ssrn.com/abstract=267499 or http://dx.doi.org/10.2139/ssrn.267499

András Simonovits (Contact Author)

Hungarian Academy of Sciences (HAS) - Research Centre for Economic and Regional Studies (HAS) ( email )

7621 Pécs, Papnovelde u. 22
Budapest, H-1112
Hungary

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