Abstract
This paper studies the redistribution and welfare effects of increasing the flexibility of individual pension take-up. We use an overlapping-generations model with Beveridgean pay-as-you-go pensions, where individuals differ in ability and life span. We find that introducing flexible pension take-up can induce a Pareto improvement when the initial pension scheme contains within-cohort redistribution and induces early retirement. Such a Pareto-improving reform entails the application of uniform actuarial adjustment of pension entitlements based on average life expectancy. Introducing actuarial non-neutrality that stimulates later retirement further improves such a flexibility reform.
Highlights
Since the 1970s, the effective retirement age has declined in almost all Western countries, while at the same time life expectancy has increased substantially
We show that under such a reform, a Pareto improvement can be achieved at a lower contribution rate or that for a given contribution rate, it leads to more positive welfare effects for all individuals
We have studied the intragenerational redistribution and welfare effects of a pension reform that introduces a flexible take-up of pension benefits
Summary
Since the 1970s, the effective retirement age has declined in almost all Western countries, while at the same time life expectancy has increased substantially. With this type of pension scheme, the labour market distortions caused by incentives to retire early, and the potential for welfare gains of introducing flexible retirement with an increased reward to continue working as studied in this paper, will be much smaller than with a Beveridgean pension system. This paper is most closely related to Cremer and Pestieau (2003) They analyse the implementation of age-dependent tax rates in an economy with a redistributive PAYG pension scheme. This policy generates the same ‘double dividend’ as the flexibility reform of the pension scheme considered in this study: it generates additional revenues and fosters redistribution from high to low incomes.
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