DP18895 Women's Labor Supply Incentives and Old-Age Income Redistribution
The risk of ending up poor in old age is shaped at young ages and it is concentrated among women. To counteract old-age poverty, many countries redistribute income through the pension system. They often do so based on an individual's lifetime earnings, like US Social Security. In this paper, we argue that a pension system that uses annual instead of lifetime earnings as basis for old-age income redistribution can lead to much better labor market outcomes and a superior old-age income distribution. We show both theoretically and quantitatively that such a system comes with broad employment incentives, especially for individuals prone to old-age poverty risk. As such, it addresses the causes of old-age poverty and not only its consequences. Our quantitative simulation model includes rich demographics and a detailed model of female labor supply. We account for gender, family status, children, and labor supply choices at the intensive and extensive margin. While lifetime-earnings-based redistribution causes substantial long-run welfare losses, annual-earnings-based redistribution increases long-run welfare, particularly for women.
