Hostname: page-component-89b8bd64d-dvtzq Total loading time: 0 Render date: 2026-05-08T03:09:01.574Z Has data issue: false hasContentIssue false
  • English
  • Français

THE RETURN ON SOCIAL SECURITY WITH INCREASING LONGEVITY

Published online by Cambridge University Press:  07 January 2016

Markus Knell
Markus Knell*
Affiliation:
Oesterreichische Nationalbank
*
Address correspondence to: Markus Knell, Economic Studies Division, Oesterreichische Nationalbank, Otto-Wagner-Platz 3, POB-61, A-1011 Vienna, Austria; e-mail: Markus.Knell@oenb.at.
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper I study the impact of increasing longevity on pay-as-you-go pension systems. First, I show that increasing longevity increases the internal rate of return. The size of the effect differs for different policy regimes. It is higher for the case where the retirement age is increased to keep the system in balance than for the case where the necessary adjustment is achieved by reducing pension benefits. Second, I study optimally chosen retirement decisions and I show that the socially optimal policy involves a shorter working life than the private optimum. The social optimum can be implemented by the use of a PAYG system that combines an actuarial and a flat pension.

Keywords

Pension SystemDemographic ChangeIncreasing Life ExpectancyRetirement Decision

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 2 , March 2017 , pp. 462 - 487
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

I want to thank two anonymous referees for very helpful comments and suggestions. The views expressed in this paper do not necessarily reflect those of the Oesterreichische Nationalbank.

References

REFERENCES

Aaron, H. (1966) The social insurance paradox. Canadian Journal of Economics 32, 371–374.Google Scholar
Bagchi, S. (in press) Is the Social Security crisis really as bad as we think? Macroeconomic Dynamics.Google Scholar
Blackorby, C., Bossert, W., and Donaldson, D. (2005) Population Issues in Social Choice Theory, Welfare Economics, and Ethics, Econometric Society Monographs. Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
Bloom, D.E., Canning, D., Mansfield, R.K., and Moore, M. (2007) Demographic change, social security systems, and savings. Journal of Monetary Economics 54 (1), 92–114.CrossRefGoogle ScholarPubMed
Bruce, N. and Turnovsky, S.J. (2013) Demography and growth: A unified treatment of overlapping generations. Macroeconomic Dynamics 17, 1605–1637.CrossRefGoogle Scholar
Carnes, B.A., Olshansky, S.J., and Grahn, D. (2003) Biological evidence for limits to the duration of life. Biogerontology 4 (1), 31–35.CrossRefGoogle Scholar
Cass, D. and Yaari, M. (1966) A re-examination of the pure consumption loans model. Journal of Political Economy 74, 353–367.CrossRefGoogle Scholar
Chen, Y. and Lau, S.-H.P. (2015) Mortality decline, retirement age, and aggregate savings. Macroeconomic Dynamics (forthcoming).CrossRefGoogle Scholar
Crawford, V. and Lilien, D. (1981) Social security and the retirement decision. Quarterly Journal of Economics 96 (3), 505–529.CrossRefGoogle Scholar
Cremer, H., Lozachmeur, J.-M., and Pestieau, P. (2004) Social security, retirement age and optimal income taxation. Journal of Public Economics 88 (11), 2259–2281.CrossRefGoogle Scholar
d'Albis, H., Lau, S.-H.P., and Sánchez-Romero, M. (2012) Mortality transition and differential incentives for early retirement. Journal of Economic Theory 147 (1), 261–283.CrossRefGoogle Scholar
de la Croix, D. and Ponthiére, G. (2010) On the golden rule of capital accumulation under endogenous longevity. Mathematical Social Sciences 59 (2), 227–238.CrossRefGoogle Scholar
Fenge, R. and Werding, M. (2003) Ageing and Fiscal Imbalances across Generations: Concepts of Measurement. CESifo working paper 842.CrossRefGoogle Scholar
Geanakoplos, J., Mitchell, O.S., and Zeldes, S.P. (1999) Social security money's worth. In Mitchell, O.S., Myers, R.J., and Young, H. (eds.), Prospects for Social Security Reform, pp. 79–151. Philadelphia: University of Pennsylvania Press.Google Scholar
Holzmann, R. and Palmer, E. (2012) NDC in the teens: Lessons and issues. In Holzmann, R., Palmer, E., and Robalino, D. (eds.), Nonfinancial Defined Contribution Pension Schemes in a Changing Pension World: Volume 1. Progress, Lessons, and Implementation, pp. 3–30. Washington, DC: World Bank Publications.CrossRefGoogle Scholar
Kalemli-Ozcan, S. and Weil, D. (2010) Mortality change, the uncertainty effect, and retirement. Journal of Economic Growth 15 (1), 65–91.CrossRefGoogle ScholarPubMed
Knell, M. (2012) Increasing Life Expectancy and Pay-As-You-Go Pension Systems. Working paper 179, Oesterreichische Nationalbank (Austrian Central Bank).Google Scholar
Lee, R. (2003) Mortality Forecasts and Linear Life Expectancy Trend. CEDA paper 2003-0003.Google Scholar
Lerner, A.P. (1959) Consumption-loan interest and money [Article and Rejoinder]. Journal of Political Economy 67, 512–518, 523–525.CrossRefGoogle Scholar
Modigliani, F. (1986) Life cycle, individual thrift, and the wealth of nations. American Economic Review 76 (3), 297–313.Google Scholar
Oeppen, J. and Vaupel, J. (2002) Demography—Broken limits to life expectancy. Science 296 (5570), 1029–1031.CrossRefGoogle ScholarPubMed
Palmer, E. (2012) Generic NDC: Equilibrium, valuation, and risk sharing with and without NDC bonds. In Holzmann, R., Palmer, E., and Robalino, D. (eds.), Nonfinancial Defined Contribution Pension Schemes in a Changing Pension World: Volume 2. Gender, Politics, and Financial Stability, pp. 309–333. Washington, DC: World Bank Publications.CrossRefGoogle Scholar
Ponthiére, G. (2003) Utilitarian Population Ethics: A Survey. Technical report, Centre de Recherche en Economie Publique et de la Population (CREPP), HEC-Management School, University of Liége.Google Scholar
Samuelson, P. (1958) An exact consumption-loan model of interest with or without the social contrivance of money. Journal of Political Economy 66, 467–482.CrossRefGoogle Scholar
Sheshinski, E. (1978) A model of social security and retirement decisions. Journal of Public Economics 10 (3), 337–360.CrossRefGoogle Scholar
Sheshinski, E. (2006) Note on longevity and aggregate savings. Scandinavian Journal of Economics 108 (2), 353–356.CrossRefGoogle Scholar
Zhang, J. and Zhang, J. (2009) Longevity, retirement, and capital accumulation in a recursive model with an application to mandatory retirement. Macroeconomic Dynamics 13, 327–348.CrossRefGoogle Scholar