Scandinavian Working Papers in Economics

Discussion Papers on Economics,
University of Southern Denmark, Department of Economics

No 5/2009: The optimal legal retirement age in an OLG model with endogenous labour supply

Casper Worm Hansen () and Lars Lønstrup ()
Additional contact information
Casper Worm Hansen: Department of Business and Economics, Postal: University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark
Lars Lønstrup: Department of Business and Economics, Postal: University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark

Abstract: The long run welfare implications of the legal retirement age are studied in a perfect foresight overlapping-generations model where agents live for two periods. Agents’ lifetime is divided between working life and retirement by a legal retirement age controlled by the government whereas agents, besides savings, control the intensive margin or "yearly" labour supply. The legal retirement age is utilized to dampen distortionary effects of payroll taxes and public pension annuities and promote capital accumulation. We show that a social optimal legal retirement age exists and how it depends on whether payroll taxes or benefit annuities ensures budget balance of the PAYG pension system.

Keywords: Optimal legal retirement age; pay-as-you-go-pension systems; overlapping-generations model

JEL-codes: E61; H55; J26

26 pages, July 1, 2009

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