Incentives to Retire Later - a Solution to the Social Security Crisis?

DIW Berlin Discussion Paper No. 266

29 Pages Posted: 10 Jan 2002

See all articles by Friedrich Breyer

Friedrich Breyer

University of Konstanz - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Mathias Kifmann

University of Konstanz - Department of Economics

Date Written: November 2001

Abstract

As one possible solution to the well-known financing crisis of unfunded social security systems, an increase in the retirement age is a popular option. To induce workers to retire later, it has been proposed to strengthen the link between retirement age and benefit level. The present paper is devoted to analyzing the long-run financial implications of such a reform. We show that with actuarial adjustments the long-run contribution rate is an increasing function of the retirement age chosen by workers. Moreover, the implicit tax paid to the pension system by a participant can increase in the long run if the retirement age rises in response to a "steep" adjustment rule. In this sense, the proposed "cure" may worsen the disease. Finally we propose an alternative adjustment scheme which avoids these negative consequences. Finally, we show how the negative effects can be avoided by forming a capital stock from the additional revenues, due to later retirement.

Keywords: pay-as-you-go, retirement age, actuarial adjustment

JEL Classification: H55, J18

Suggested Citation

Breyer, Friedrich and Kifmann, Mathias, Incentives to Retire Later - a Solution to the Social Security Crisis? (November 2001). DIW Berlin Discussion Paper No. 266. Available at SSRN: https://ssrn.com/abstract=296089 or http://dx.doi.org/10.2139/ssrn.296089

Friedrich Breyer (Contact Author)

University of Konstanz - Department of Economics ( email )

Fachbereich Wirtschaftswissenschaften Fach D-135
D-78457 Konstanz
Germany
+49 (0)75 31/88-25 68 (Phone)
+49 (0)75 31/88-41 35 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Mathias Kifmann

University of Konstanz - Department of Economics ( email )

Fachbereich Wirtschaftswissenschaften Fach D-135
D-78457 Konstanz
Germany

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