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Designing benefit rules for flexible retirement: Welfare vs. redistribution

Author

Listed:
  • P. Eső

    (Oxford University, Oxford, UK)

  • A. Simonovits

    (Institute of Economics of the Hungarian Academy of Sciences, Budaörsi út 40, H-1112 Budapest, Hungary)

  • J. Tóth

    (Budapest University of Technology and Economics, Budapest, Hungary)

Abstract

With flexible (variable) retirement every individual determines his optimal retirement age, depending on a common benefit-retirement age schedule and his life expectancy. The government maximises the average expected lifetime utility minus a scalar multiple of the variance of the lifetime pension balances to achieve harmony between the maximisation of welfare and the minimisation of redistribution. Since the government cannot identify types by life expectancy, it must take the individual incentive compatibility constraints into account. Second-best schedules strongly reduce the variances of benefits and of retirement ages of the so-called actuarially fair system, thus achieving higher social welfare and lower redistribution.

Suggested Citation

  • P. Eső & A. Simonovits & J. Tóth, 2011. "Designing benefit rules for flexible retirement: Welfare vs. redistribution," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 61(1), pages 3-32, March.
    • Handle: RePEc:aka:aoecon:v:61:y:2011:i:1:p:3-32
    Note: This work is a revision of a discussion paper by Esõ – Simonovits (2002). We express our debt to persons – sometimes anonymous – commenting the previous versions of the paper and related papers, especially Rudolf Borlói, Péter Alács, Nicholas Barr, Peter Diamond, late László Hablicsek, János Kornai, Judit Marosi, János Vincze and Thomas Weitzenblum. András Simonovits and János Tóth acknowledge the financial support of the Hungarian Scientific Research Fund (OTKA) K 81483 and NK 63066, respectively.
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    Citations

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    Cited by:

    1. András Simonovits, 2014. "Benefit-retirement age schedules and redistribution in public pension systems," CERS-IE WORKING PAPERS 1430, Institute of Economics, Centre for Economic and Regional Studies.
    2. Stefan Domonkos & Andras Simonovits, 2016. "Pensions in transition in EU11 countries between 1990 and 2015," CERS-IE WORKING PAPERS 1615, Institute of Economics, Centre for Economic and Regional Studies.
    3. Tibor Czegledi & Endre Szabo & Melinda Tir & Andras Simonovits, 2016. "Retirement rules in Hungary: gainers and losers," CERS-IE WORKING PAPERS 1631, Institute of Economics, Centre for Economic and Regional Studies.
    4. Andras Simonovits, 2018. "Designing pension benefits when longevities increase with wages," CERS-IE WORKING PAPERS 1804, Institute of Economics, Centre for Economic and Regional Studies.
    5. András Simonovits, 2014. "Design Errors in Public Pension Systems: The Case of Hungary," CERS-IE WORKING PAPERS 1414, Institute of Economics, Centre for Economic and Regional Studies.
    6. Tibor Czeglédi & András Simonovits & Endre Szabó & Melinda Tir, 2017. "What has been Wrong with the Retirement Rules in Hungary?," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 67(3), pages 359-387, September.
    7. Simonovits, András & Szabó, Endre & Czeglédi, Tibor & Tir, Melinda, 2016. "Nyugdíjba vonulási szabályok Magyarországon - nyertesek és vesztesek [Retirement rules in Hungary: gainers and losers]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1261-1288.
    8. Molnár, D. László & Hollósné Marosi, Judit, 2015. "Az öregségi nyugdíjasok halandósága. A nyugellátási összeg, a nyugdíjazási életkor és a halandóság összefüggései Magyarországon, 2004-2012 [Mortality of old-age pensioners. Association among the am," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1258-1290.
    9. Simonovits, András, 2018. "Hogyan tervezzük a nyugdíjjáradék-függvényt, ha a halandóság a kereset csökkenő függvénye? [Designing pension-benefit schedules when longevities increase with wages]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 831-846.

    More about this item

    Keywords

    flexible retirement; asymmetric information; actuarial fairness; redistribution; mechanism design;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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