DP4863 The Evolution of Retirement

Author(s): José Ignacio Conde-Ruiz , Vincenzo Galasso , Paola Profeta

Publication Date: January 2005

Keyword(s): pensions , lifetime income effect , tax burden , politico-economic Markovian equilibrium

JEL(s): D72 , H53 , H55

Programme Areas: Labour Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP4863.asp

We provide a long-term perspective on the individual retirement behaviour and on the future of early retirement. In a cross-country sample, we find that total pension spending depends positively on the degree of early retirement and on the share of elderly in the population, which increase the proportion of retirees, but has hardly any effect on the per capita pension benefits. We show that in a Markovian political economic theoretical framework, in which incentives to retire early are embedded, a political equilibrium is characterized by an increasing sequence of social security contribution rates converging to a steady state and early retirement. Comparative statistics suggest that aging and productivity slow-downs lead to higher taxes and more early retirement. However, when income effects are factored in, the model suggests that periods of stagnation – characterized by decreasing labour income – may lead middle-aged individuals to postpone retirement.