DP3778 Voting on Pensions with Endogenous Retirement Age

Author(s): Georges Casamatta, Helmuth Cremer, Pierre Pestieau
Publication Date: January 2003
Keyword(s): majority voting, retirment age, social security
JEL(s): D72, D90, H55
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3778

It is often argued that the observed trend towards early retirement is due mainly to the implicit tax imposed on continued activity of elderly workers. We study the relevance of such a distortion in a political economy model with endogenous age of retirement. The setting is a two-period overlapping generations model. Individuals differ in their productivity. In the first period they work a fixed amount of time; in the second, they choose when to retire and then receive a flat rate pension benefit. Pensions are financed by a payroll tax on earnings in the first and in the second period of life. Such a tax is non-distortionary in the first period; it is in the second period. We allow for some rebating of the second period tax. Individuals vote on the level of the payroll tax given a rebate that can range from 0 (biased system) to 100% (neutral system). We provide sufficient conditions for the existence of a voting equilibrium and study its properties. Under these conditions, high tax rates are supported by all the old and by low productivity young individuals. We show that the pivotal voter is a young individual. The number of young individuals who have higher wage than the pivotal voter equals half the total population. Finally, we study the simultaneous determination of the bias and the tax rate through a voting procedure and show that the equilibrium (if any) implies a bias that is always positive and may or not be larger than one.