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

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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.

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