Population aging and legal retirement age

Authors: Juan A Lacomba Francisco Lagos

Publish Date: 2005/11/16

Volume: 19, Issue: 3, Pages: 507-519

PDF Link

Abstract

This paper analyzes the effects of population aging on the preferred legal retirement age What is revealed is the crucial role that the indirect ‘macro’ effects resulting from a change in the legal retirement age play in the optimal decision Two social security systems are studied Under a defined contribution scheme aging lowers the preferred legal retirement age However under a defined pension scheme the retirement age is delayed This result shows the relevance of correctly choosing the parameter affected by the dependency ratio in the design of the social security programmeThe authors thank Ignacio Ortuño Ortin for all his constructive suggestion We also owe thanks for helpful comments to Georges Casamatta Valuable comments from Subir Chattopaday Ramón Faulí Francisco Marhuenda Slomo Webber and two anonymous referees on a previous version of this paper are also gratefully acknowledgedFirst ∂c p /∂R and ∂c p /∂n are strictly positive an increase in R augments the working period and reduces the contribution rate both effects implying higher consumption an increase in n reduces the dependency ratio and the contribution rate and this effect also implies higher consumption2 We have to prove that partial R tau mathordleft/ vphantom partial R tau partial n right kernnulldelimiterspace partial n 0 It is easy to check that Eq 2 is strictly concave therefore the sign of partial R tau mathordleft/ vphantom partial R tau partial n right kernnulldelimiterspace partial n also coincides with the sign of Eq 10Again partial c tau mathordleft/ vphantom partial c tau partial R right kernnulldelimiterspace partial R and partial c tau mathordleft/ vphantom partial c tau partial n right kernnulldelimiterspace partial n are strictly positive an increase in R augments the working period and raises pension benefits both effects implying higher consumption an increase in n reduces the dependency ratio and thus augments pension benefits this effect also implying higher consumptionIt can be shown numerically by means of a mathematical programme that LHS1 for any n∈0 1 and for any R∈0 T Indeed the mathematical programme runs results lower than 1 for values of R very close to 0 Therefore we should impose a lower bound on R although almost no restrictive for instance R∈T/100 T

Keywords: