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Social Desirability of Earnings Tests

Author

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  • Cremer Helmuth

    (Toulouse School of Economics (GREMAQ, IDEI and Institut universitaire de France), 21 Allée de Brienne,Toulouse, France)

  • Pestieau Pierre

    (CREPP, Université de Liège, Place du 20 Août 7,Liège, Belgium)

  • Lozachmeur Jean-Marie

    (Toulouse School of Economics (GREMAQ and IDEI),Toulouse, France)

Abstract

In many countries, pension systems involve some form of earnings test; i.e. an individual’s benefits are reduced if he has labor income. This paper examines whether or not such earnings tests emerge when pension system and income tax are optimally designed. We use a simple model with individuals differing both in productivity and in their health status. The working life of an individual has two ‘endings’: an official retirement age at which he starts drawing pension benefits (while possibly supplementing them with some labor income) and an effective age of retirement at which professional activity is completely given up. Weekly work time is endogenous, but constant in the period before official retirement and again constant (but possibly at a different level), after official retirement. Earnings tests mean that earnings are subject to a higher tax after official retirement than before.We show under which conditions earnings tests emerge both under a linear and under a non-linear tax scheme. In particular, we show that earnings tests will occur if heterogeneities in health or productivity are more significant after official retirement than before.

Suggested Citation

  • Cremer Helmuth & Pestieau Pierre & Lozachmeur Jean-Marie, 2008. "Social Desirability of Earnings Tests," German Economic Review, De Gruyter, vol. 9(2), pages 114-134, May.
    • Handle: RePEc:bpj:germec:v:9:y:2008:i:2:p:114-134
    DOI: 10.1111/j.1468-0475.2008.00427.x
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    References listed on IDEAS

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    1. Cremer, Helmuth & Lozachmeur, Jean-Marie & Pestieau, Pierre, 2004. "Social security, retirement age and optimal income taxation," Journal of Public Economics, Elsevier, vol. 88(11), pages 2259-2281, September.
    2. Richard Disney & Sarah Smith, 2002. "The Labour Supply Effect of the Abolition of the Earnings Rule for Older Workers in the United Kingdom," Economic Journal, Royal Economic Society, vol. 112(478), pages 136-152, March.
    3. Robert Fenge & Pierre Pestieau, 2005. "Social Security and Early Retirement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262062496, December.
    4. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
    5. Leora Friedberg, 2000. "The Labor Supply Effects of the Social Security Earnings Test," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 48-63, February.
    6. Alan L. Gustman & Thomas L. Steimeier, 2004. "The Social Security Retirement Earning Test,Retirement and Benefit Claiming," Working Papers wp090, University of Michigan, Michigan Retirement Research Center.
    7. Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, number grub99-1, February.
    8. Jonathan Gruber & David A. Wise, 1999. "Introduction to "Social Security and Retirement around the World"," NBER Chapters, in: Social Security and Retirement around the World, pages 1-35, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Woodland, A., 2016. "Taxation, Pensions, and Demographic Change," 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 713-780, Elsevier.
    2. Wheadon, Daniel & Castex, Gonzalo & Kudrna, George & Woodland, Alan, 2024. "Non-linear means-tested pensions: Welfare and distributional analyses," Economic Modelling, Elsevier, vol. 138(C).
    3. Fehr, Hans & Uhde, Johannes, 2012. "Optimal Pension Design in General Equlibrium," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62024, Verein für Socialpolitik / German Economic Association.
    4. Daniel Vuuren, 2014. "Flexible Retirement," Journal of Economic Surveys, Wiley Blackwell, vol. 28(3), pages 573-593, July.
    5. Fehr, Hans & Uhde, Johannes, 2014. "Means-testing and economic efficiency in pension design," Economic Modelling, Elsevier, vol. 44(S1), pages 57-67.
    6. Hans Fehr & Johannes Uhde, 2013. "On the optimal design of pension systems," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 40(3), pages 457-482, August.

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    More about this item

    Keywords

    Earnings tests; social security; age-related taxation; retirement age;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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