Designing Optimal Linear Rules for Retirement

Abstract

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