Designing Optimal Benefit Rules for Flexible Retirement
[KELLOGG SCHOOL OF MANAGEMENT, NORTHWESTERN UNIVERSITY - By Peter Eso and Andras Simonovits - September 2002] Abstract: This paper applies the techniques of mechanism design to find an optimal nonlinear pension benefit rule for flexible old-age retirement. We assume that individuals have private information regarding their expected lifespans. The government's goal is to design a pension system (a payroll tax and a function relating benefits to employment length), which maximizes a social welfare function and satisfies a social budget constraint. Since individuals with different expected lifespans optimize their employment lengths conditional on the benefit function, the government must also take into account incentive constraints. We characterize the solution to this problem for various social welfare functions. Under utilitarianism, the solution is a completely inflexible system, where all individuals retire at the same age with the same (yearly) benefits; and, surprisingly, the first-best (complete information) aggregate welfare is attained. If the social welfare function is strictly concave, then individuals with shorter expected lifespans retire earlier with benefits lower than those in the first-best. In the optimal pension system, individuals with shorter expected lifespans subsidize those who expect to live longer. We also compute the optimal benefit rule for several specifications with CRRA utility functions and realistic parameter values, and discuss the numerical results.

Demographic Evolutions and Unemployment: an Analysis of French Labour Market with Workers Generations
[CENTRE D'ETUDES PROSPECTIVES ET D'INFORMATION INTERNATIONALES - By Jean Chateau, Jean-Louis Gurin and Florence Legros - October 2002] Abstract: This paper describes a segmented matching labour market model with generations of workers. This model is calibrated on French data. The results refute the usual idea, according to which a decrease in labour supply leads to a decrease in unemployment. The combination of pure demographic effects with scalwedge effects due to the increase in subscription rates lead to a serious rise of the unemployment rate. Various alternative specifications are also studied such as an increase of work duration or a lowering in replacement rates.