Abstract
This article attempts to understand the reward and punishment mechanisms of the flexible retirement system in China. The life-cycle model is applied in the pay-as-you-go pension system with flexible retirement policy to establish the numerical model of optimal retirement age under the consideration of prolonged life span. The effect of penalty rate for early retirement and incentive rate for delayed retirement on optimal retirement age is studied. Numerical experiments show that appropriate delayed retirement incentive rate incentivises a delayed retirement decision for maximising the total lifetime utility. The optimal retirement age is raised by prolonging lifespan, and the flexible retirement system is an effective means to implement delayed retirement policy.
Highlights
According to China’s current retirement system, males retire at the age of 60, whereas females retire at 55
The life-cycle model is applied in the pay-as-you-go pension system with flexible retirement policy to establish the numerical model of optimal retirement age under the consideration of prolonged life span
The optimal retirement age is raised by prolonging lifespan, and the flexible retirement system is an effective means to implement delayed retirement policy
Summary
According to China’s current retirement system, males retire at the age of 60, whereas females retire at 55. As the retirement system is deeply rooted in public, if the retirement age is suddenly extended, public discontent may inevitably occur. Flexible retirement system allows workers to have flexibility in retirement age, patterns and income. Reward and punishment mechanisms will affect people’s retirement options. In Germany, early retirement for a year will lead to a 3.6% pension reduction, whereas delayed retirement for one year will result in a 6% increase (Lin, 2013).
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