The Political Economy of Social Security under Differential Longevity and Voluntary Retirement

Authors


  • Marie-Louise Leroux, FRS-FNRS and CORE, Université catholique de Louvain, Voie du Roman Pays, 34, B-1348 Louvain-la-Neuve, Belgium (marie-louise.leroux@uclouvain.be).

  • I would like to thank Helmuth Cremer, Philippe De Donder, and Jean-Marie Lozachmeur for their guidance. I would also like to thank participants at Cesifo Summer Institute in Venice 2007, Workshop on “Longevity and Annuitization”: in particular, Paula Lopes for her discussion, Pierre Pestieau, Grégory Ponthière and Eytan Sheshinski for their comments. I am also grateful to Georges Casamatta, Catherine Bobtcheff, Andrea Amelio, and to three anonymous referees for their helpful comments on this paper.

Abstract

This paper studies a model where the existence of a pension system is decided by majority voting. We assume that individuals have the same income but different longevity. Retirement is voluntary and the pension system is characterised by a payroll tax on earnings and a flat pension benefit. Individuals vote only on the tax level. We show that a pension system emerges when there is a majority of long-lived individuals and that voluntary retirement enables to lower the size of the transfers received by the long-lived. A rise in average longevity will also increase the size of the pension system.

Ancillary