The Role of Income Effects in Early Retirement

J. Ignacio Conde Ruiz, Vincenso Galasso e Paola Profeta

J. Ignacio Conde Ruiz (Universidad Complutense de Madrid), Vincenso Galasso (Dipartimento di Analisi delle Politiche e Management Pubblico, Dondena e IGIER), Paola Profeta (Dipartimento di Analisi delle Politiche e Management Pubblico, Dondena e Econpubblica) hanno pubblicato The Role of Income Effects in Early Retirement  (ECONPUBBLICA Working Paper No. 158).

Abstract: We provide a long term perspective on thr individual retirement behavior and on the future of retirement by emphasizing the role of (negative) income efefcts. We consider a political economic theorical framework, with actuarially "fair" and "unfair" early retirement schemes, and derive a political equilibrium with positive social security contribution rates and early retirement. A reduction in the wages in youth, consistent with the recent labor market trends since the massive introduction of temporary jobs, induces workers to postpone retirement, and - in the "unfair" system - leads to lower contribution rates. A reduction in the growth rate of the economy has opposite effects on the retirement decisions, leading - in the "unfair" system - to more early retirement. Aging induces a negative income effect, but has also an opposite political effects on social security contributions and retirement decisions. For an actuarially "fair" social security system, we provide conditions for the political effect to dominate; in an "unfair" scheme, numerical simulations confirm a slignt predominance of the political effect, as contribution rates increase. These results may shed some light on the future of early retirement in aging societies.