Social Security and Retirement Decision: A Positive and Normative Approach*

Abstract

Social insurance for the elderly is judged responsible for the widely observed trend towards early retirement. In a world of laissez-faire or in a firstbest setting, there would be no such trend. However, when first-best instruments are not available, because health and productivity are not observable, the optimal social insurance policy may imply a distortion on the retirement decision. The main point we make is that while there is no doubt that retirement systems induce an excessive bias towards early retirement in many countries, a complete elimination of this bias (i.e. a switch to an actuarially fair system) is not the right answer for two reasons. First, some distortions are second-best optimal. This is the normative argument. Second, and on the positive side, the elimination of the bias might be problematic from a political perspective. Depending on the political process, either it may not be feasible or alternatively it may tend to undermine the political support for the pension system itself.

The Decline of Early Retirement Pathways in the Netherlands: An Empirical Analysis for the Health Care Sector

“…Workers are likely to be risk averse, and they have a preference for reasonable labour market exit options in case of a substantial loss in skills, for example due to health or technology shocks. The development of tools for welfare analysis, see Cremer et al (2004Cremer et al ( , 2008 and Zaidi and Whitehouse (2009), is therefore necessary to assess the effectiveness of policy. a Small jobs are jobs with a part time factor smaller than 40%, middle jobs are jobs with a part time factor between 40 and 80%, large jobs are jobs with a part time factor larger than 80%.…”

Early Retirement and Financial Incentives: Differences between High and Low Wage Earners

“…An optimal early retirement scheme may include an early retirement option from a certain age onwards with an actuarial unfair adjustment of the benefit level in case the individual decides to continue working (Cremer et al 2004(Cremer et al , 2008. The early retirement option serves as an insurance against unobservable health shocks.…”

“…This may be seen as unfair as low wage earners may have 'hazardous or arduous' jobs, possibly reducing the time during which retirement benefit can be enjoyed (Zaidi and Whitehouse, 2009). Optimal early retirement and pension institutions may include financial incentives to induce workers in good health to continue working (Cremer et al, 2004(Cremer et al, , 2008. For the assessment of the impact of such policy, it is useful to know how high and low wage earners react to such financial incentives.…”

Designing benefit rules for flexible retirement: Welfare vs. redistribution

“…Much later Fabel (1994), Diamond (2003), Simonovits (2003aSimonovits ( , b, 2006, Sheshinski (2006), Bommier et al (2007) and Cremer et al (2008) considered old-age retirement with heterogeneity in individual life expectancy. 4 Fabel (1994, Chapter 9) derived the optimal benefit rule in a model, where there are two types (expectedly short-and long-lived), who may choose their ages of retirement.…”

“…According to the dominant view (e.g. Gruber -Wise 1999;Lindbeck -Persson 2003;Fenge -Pestieau 2005;Cremer et al 2008), in most countries these incentives are dysfunctional: they hardly sanction early retirement and they hardly support late retirement, causing a low average retirement age. As the population is aging, however, low average retirement age is becoming less and less tolerable.…”