DP2589 Early Retirement

Author(s): José Ignacio Conde-Ruiz, Vincenzo Galasso
Publication Date: October 2000
Keyword(s): De-Industrialization, Policy Persistence, Social Security, Structure-Induced Equilibrium
JEL(s): D72, H53, H55
Programme Areas: Labour Economics, Public Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2589

Generous early retirement provisions account for a large proportion of the drop in the labour force participation of elderly workers. The aim of this paper is to provide a political-economic explanation of the wide spread adoption of early retirement. We suggest that the political support for generous early retirement provisions relies on: (i) the existence of an initial, significant group of redundant elderly workers with incomplete working history, who are not entitled to an old age pension; and (ii) the policy persistence that this provision introduces by inducing low-ability workers to retire early. The majority which supports a social security system with early retirement in a bidimensional voting game is composed of elderly workers with incomplete working history and low-ability workers. A descriptive analysis of eleven OECD countries confirms the relevance of the initial group of redundant elderly workers. Early retirement provisions were adopted during the deindustrialization process, almost always, immediately after the first severe decrease in industrial employment.