Benefit-Retirement Age Schedules and Redistribution in Public Pension Systems

The dependence of benefits on the retirement age (the schedule) is an important feature in any public pension system. The nonfinancial defined contribution (NDC) pension system has recently become popular mainly because of its alleged actuarial fairness. Using the framework of mechanism design with adverse selection, these systems have theoretically been criticized because they neglect the resulting regressive intracohort redistribution: longer-lived workers retire later and are rewarded as if their life expectancies were average. We document such adverse selection on Hungarian data. The resulting redistribution can be diminished but not eliminated. Giving up the framework of mechanism design, we corroborate our earlier qualitative findings in a more realistic framework.