Scandinavian Working Papers in Economics
Umeå Economic Studies,
Umeå University, Department of Economics
No 818: The Standard Deviation of Life-Length, Retirement Incentives, and Optimal Pension Design
Thomas Aronsson () and Sören Blomquist ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Sören Blomquist: Department of Economics, Uppsala University, Postal: SE – 751 20 Uppsala, Sweden
Abstract: In this paper, we consider how the retirement age as well as a tax financed pension system ought to respond to a change in the standard deviation of the length of life. In a first best framework, where a benevolent government exercises perfect control over the individuals’ labor supply and retirement-decisions, the results show that a decrease in the standard deviation of life-length leads to an increase in the optimal retirement age and vice versa, if the preferences for “the number of years spent in retirement” are characterized by constant or decreasing absolute risk aversion. A similar result follows in a second best setting, where the government raises revenue via a proportional tax (or pension fee) to finance a lump-sum benefit per year spent in retirement. We consider two versions of this model, one with a mandatory retirement age decided upon by the government and the other where the retirement age is a private decision-variable.
Keywords: Uncertain lifetime; retirement; pension system
24 pages, October 4, 2010
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