Social Security and Longevity

25 Pages Posted: 21 Nov 2005

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: October 2005

Abstract

Many countries face the problem of how to reform social security systems to cope with increasing life expectancy. This raises questions concerning both distribution and risk sharing across generations. These issues are addressed within an OLG model with stochastic life expectancy across generations and endogenous retirement decisions. The social optimum is shown to imply that retirement age should be proportional to longevity. Moreover, increasing longevity calls for pre-funding even if the utility of all generations is weighted equal to the objective discount rate. The social optimum cannot be decentralized due to a conflict between incentives and risk sharing. The implications of stylized social security systems for risk sharing and retirement incentives are analyzed.

JEL Classification: H55, J11, J14, J18

Suggested Citation

Andersen, Torben M., Social Security and Longevity (October 2005). CESifo Working Paper Series No. 1577, Available at SSRN: https://ssrn.com/abstract=852505

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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