IDEAS home Printed from https://ideas.repec.org/a/cup/demeco/v87y2021i2p141-167_1.html
   My bibliography  Save this article

Actuarial deductions for early retirement

Author

Listed:
  • Knell, Markus

Abstract

This paper studies how the rates of deduction for early retirement have to be determined in pay-as-you-go (PAYG) systems in order to keep their budget stable. The derivation of these deductions requires the use of a multiperiod intertemporal budget constraint that involves assumptions about the retirement behavior of past, present, and future cohorts. In general, it is not possible to calculate budget-neutral deductions from the budget constraint of a single individual who retires before the target retirement age—an approach that dominates the related literature. Only for specific cases one can use this second approach but then one has to adjust the discount rate to the assumption about collective retirement. If there is only one deviating individual, then the right choice is the market interest rate while for a stationary retirement distribution it is the internal rate of return of the PAYG system. In this case, the necessary deductions are lower than under the standard approach. This is also true for retirement ages that fluctuate randomly around a stationary distribution. Various long-run developments (e.g., increases in life expectancy or permanent changes in the average retirement age) might cause challenges for the sustainability of the pension system. These developments, however, can only be dealt with by adequate adjustments to the basic pension formulas and not by the use of deduction rates.

Suggested Citation

  • Knell, Markus, 2021. "Actuarial deductions for early retirement," Journal of Demographic Economics, Cambridge University Press, vol. 87(2), pages 141-167, June.
    • Handle: RePEc:cup:demeco:v:87:y:2021:i:2:p:141-167_1
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S2054089220000176/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Robert Fenge & Pierre Pestieau, 2005. "Social Security and Early Retirement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262062496, December.
    2. Gustman, Alan L. & Steinmeier, Thomas L., 2015. "Effects of social security policies on benefit claiming, retirement and saving," Journal of Public Economics, Elsevier, vol. 129(C), pages 51-62.
    3. Monika Queisser & Edward Whitehouse, 2006. "Neutral or Fair?: Actuarial Concepts and Pension-System Design," OECD Social, Employment and Migration Working Papers 40, OECD Publishing.
    4. Friedrich Breyer & Stefan Hupfeld, 2009. "Fairness of Public Pensions and Old-Age Poverty," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(3), pages 358-380, September.
    5. Shoven, John B. & Slavov, Sita Nataraj, 2014. "Does it pay to delay social security?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 13(2), pages 121-144, April.
    6. Gasche Martin, 2012. "Was sind die richtigen Rentenabschläge? – neue Perspektiven," Review of Economics, De Gruyter, vol. 63(2), pages 187-235, August.
    7. Joshua R. Goldstein, 2006. "Found in translation?," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 14(5), pages 71-84.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Markus Knell & Reinhard Koman, 2022. "Pension Entitlements and Net Wealth in Austria (Markus Knell, Reinhard Koman)," Working Papers 238, Oesterreichische Nationalbank (Austrian Central Bank).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Maurer, Raimond & Mitchell, Olivia S., 2021. "Older peoples' willingness to delay social security claiming," Journal of Pension Economics and Finance, Cambridge University Press, vol. 20(3), pages 410-425, July.
    2. Svetlana Pashchenko & Ponpoje Porapakkarm, 2024. "Accounting For Social Security Claiming Behavior," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(1), pages 505-545, February.
    3. Börsch-Supan, Axel & Härtl, Klaus & Leite, Duarte N., 2018. "Earnings test, non-actuarial adjustments and flexible retirement," Economics Letters, Elsevier, vol. 173(C), pages 78-83.
    4. Börsch-Supan, A. & Härtl, K. & Leite, D.N., 2016. "Social Security and Public Insurance," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 781-863, Elsevier.
    5. Fehr, Hans & Jokisch, Sabine & Kallweit, Manuel & Kindermann, Fabian & Kotlikoff, Laurence J., 2013. "Generational Policy and Aging in Closed and Open Dynamic General Equilibrium Models," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 1719-1800, Elsevier.
    6. Christian Keuschnigg & Mirela Keuschnigg & Christian Jaag, 2011. "Aging and the Financing of Social Security in Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 147(II), pages 181-231, June.
    7. Frank W. Heiland & Na Yin, 2014. "Have We Finally Achieved Actuarial Fairness of Social Security Retirement Benefits and Will It Last?," Working Papers wp307, University of Michigan, Michigan Retirement Research Center.
    8. Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla & Tatjana Schimetschek, 2021. "Optimal social security claiming behavior under lump sum incentives: Theory and evidence," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(1), pages 5-27, March.
    9. Jason Scott & John B. Shoven & Sita Slavov & John G. Watson, 2019. "Retirement Implications of a Low Wage Growth, Low Real Interest Rate Economy," NBER Working Papers 25556, National Bureau of Economic Research, Inc.
    10. Gopi Shah Goda & Emilie Jackson & Lauren Hersch Nicholas & Sarah See Stith, 2023. "The impact of Covid-19 on older workers’ employment and Social Security spillovers," Journal of Population Economics, Springer;European Society for Population Economics, vol. 36(2), pages 813-846, April.
    11. Goda, Gopi Shah & Ramnath, Shanthi & Shoven, John B. & Slavov, Sita Nataraj, 2018. "The financial feasibility of delaying Social Security: evidence from administrative tax data," Journal of Pension Economics and Finance, Cambridge University Press, vol. 17(4), pages 419-436, October.
    12. Artige, L. & Dedry, A. & Pestieau, P., 2014. "Social security and economic integration," Economics Letters, Elsevier, vol. 123(3), pages 318-322.
    13. Pilar García-Gómez & Sergi Jiménez-Martín & Judit Vall Castelló, 2014. "Financial Incentives, Health, and Retirement in Spain," NBER Chapters, in: Social Security Programs and Retirement Around the World: Disability Insurance Programs and Retirement, pages 455-495, National Bureau of Economic Research, Inc.
    14. Gorry, Devon & Lee, Kyung Min & Slavov, Sita Nataraj, 2023. "Does the actuarial adjustment for pension delay affect retirement and claiming decisions?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 22(4), pages 590-603, October.
    15. Ludwig, Alexander, 2016. "Das Deutsche Rentensystem: Thesen zur derzeitigen Diskussion um "Umkehr"-Reformen," SAFE White Paper Series 40, Leibniz Institute for Financial Research SAFE.
    16. Johann K. Brunner & Bernd Hoffmann, 2010. "Versicherungsmathematisch korrekte Pensionsabschläge," Economics working papers 2010-13, Department of Economics, Johannes Kepler University Linz, Austria.
    17. Matthew S. Rutledge & John E. Lindner, 2016. "Do Late-Career Wages Boost Social Security More For Women Than Men?," Working Papers, Center for Retirement Research at Boston College wp2016-13, Center for Retirement Research.
    18. Tim Krieger & Christine Meemann & Stefan Traub, 2022. "Inequality, Life Expectancy, and the Intragenerational Redistribution Puzzle - Some Experimental Evidence," CESifo Working Paper Series 9677, CESifo.
    19. Hans Fehr & Manuel Kallweit & Fabian Kindermann, 2011. "Should Pensions be Progressive? Yes, at least in Germany!," CESifo Working Paper Series 3636, CESifo.
    20. Volker Meier & Martin Werding, 2010. "Ageing and the welfare state: securing sustainability," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 26(4), pages 655-673, Winter.

    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J1 - Labor and Demographic Economics - - Demographic Economics
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:demeco:v:87:y:2021:i:2:p:141-167_1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/dem .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.