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Two-Tier State Pensions: Labour Supply and Income Distribution

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  • Creedy, John

Abstract

This paper compares state pensions using a two-period model which allows for labor supply responses. A two-tier pension gives rise to a nonconvex budget constraint facing individuals, giving rise to a range of labor supply responses. The paper uses a social welfare function to consider the trade-off between average utility and inequality. The trade-off displays a backward bending section whereby, above a certain tax rate, further increases in tax reduce average utility and increase inequality. A major result is that, in terms of the trade-off between equity and efficiency, the flat-rate pension dominates the two-tier pension. Hence a higher social indifference curve can always be reached using a flat-rate pension. Copyright 1994 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Creedy, John, 1994. "Two-Tier State Pensions: Labour Supply and Income Distribution," The Manchester School of Economic & Social Studies, University of Manchester, vol. 62(2), pages 167-183, June.
    • Handle: RePEc:bla:manch2:v:62:y:1994:i:2:p:167-83
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    Cited by:

    1. Corsini, Lorenzo & Spataro, Luca, 2011. "Optimal decisions on pension plans in the presence of financial literacy costs and income inequalities," MPRA Paper 30946, University Library of Munich, Germany.

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