Designing Optimal Linear Rules for Retirement
Central European University Economics Department Working paper No. 6/2002
15 Pages Posted: 11 Mar 2003
Date Written: 2002
This paper applies the method of mechanism design to find optimal linear pension line rules (contribution rate and monthly benefit function) for flexible retirement: First the government announces a rule, making the benefit dependent on employment length. Individuals with different lifespans and utility functions optimize their employment lengths conditional on that rule. The government (knowing only the statistical distribution of the individual characteristics, but not the individual values) chooses an optimal linear rule, which maximizes the social welfare (e.g. the aggregated individual maxima) under a social constraint (e.g. the aggregated net lifetime contribution equals zero).
Keywords: flexible retirement, asymmetric information, actuarial fairness, mechanism design
JEL Classification: D82, D91, H55
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