Reforming the retirement scheme: flexible retirement vs legal retirement age
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Universidad de Granada. Departamento de Teoría e Historia Económica
Social securityFlexible retirementLegal retirement age
Lacomba, J.A.; Lagos, F.M. Reforming the retirement scheme: flexible retirement vs legal retirement age. Universidad de Granada. Departamento de Teoría e Historia Económica (2008). (The Papers; 09/01). [http://hdl.handle.net/10481/31545]
We compare a Social Security system where people can retire at the age of their own choice with one in which there is a legal retirement age elected through a majority voting process. We analyze how incentives on retirement decisions change depending on the retirement rules. We show that individuals prefer a legal retirement age higher than that they would choose in the flexible scheme since in this scheme they ignore the impact of their decisions on the Social Security budget constraint. In spite of that, we show that when the legal retirement age significantly limits the retirement age of high-wage workers, a flexible scheme would improve the financing of the pension system. Finally, we show that even when pension benefits are higher with a legal retirement age, a flexible system might be implemented since it would be preferred by a majority of the population composed by low- and high-wage workers.