Flexible Retirement and Optimal Taxation

Ndiaye, Abdoulaye (2018): Flexible Retirement and Optimal Taxation.

Abstract

This paper studies optimal insurance against idiosyncratic wage shocks in a life cycle model with intensive labor supply and endogenous retirement. When the fixed cost of work is increasing in wage, the optimal retirement wedge provides stronger incentives for delayed retirement with age. Retirement benefits that resemble the US Social Security system can implement the optimum. Calibrated numerical simulations suggest that a mix of retirement benefits that increase with claiming age, and age-dependent linear taxes, is close to optimal.

• Item Type: MPRA Paper
• Language: English
• Keywords: Retirement, Optimal Taxation, Social Security
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J26 - Retirement ; Retirement Policies

References

Aguiar, Mark, and Hurst, Erik. 2013. Deconstructing life cycle expenditure. Journal of Political Economy, 121(3), 437–492. Aguila, Emma, Attanasio, Orazio, and Meghir, Costas. 2011. Changes in consumption at retirement: evidence from panel data. Review of Economics and Statistics, 93(3), 1094–1099. Albanesi, Stefania, and Sleet, Christopher. 2006. Dynamic optimal taxation with private information. The Review of Economic Studies, 73(1), 1–30. Alpert, Abby, and Powell, David. 2013. Estimating Intensive and Extensive Tax Responsiveness: Do Older Workers Respond to Income Taxes? Atkinson, Anthony Barnes, and Stiglitz, Joseph E. 1976. The design of tax structure: direct versus indirect taxation. Journal of public Economics, 6(1-2), 55–75. Banks, James, Blundell, Richard, and Tanner, Sarah. 1998. Is there a retirement-savings puzzle? American Economic Review, 769–788. Barro, Robert J, and Redlick, Charles J. 2011. Macroeconomic effects from government purchases and taxes. The Quarterly Journal of Economics, 126(1), 51–102. Bergemann, Dirk, and Strack, Philipp. 2015. Dynamic revenue maximization: A continuous time approach. Journal of Economic Theory, 159, 819–853. Bismut, Jean-Michel. 1973. Conjugate convex functions in optimal stochastic control. Journal of Mathematical Analysis and Applications, 44(2), 384–404. 53 Blundell, Richard, French, Eric, and Tetlow, Gemma. 2016. Retirement incentives and labor supply. Pages 457–566 of: Handbook of the economics of population aging, vol. 1. Elsevier. Bureau, US Census. 2016. American community survey. Selected characteristics of the native and foreign-born populations: 2016 American Community Survey 1-year estimates. Chang, Yongsung, Kim, Sun-Bin, Kwon, Kyooho, Rogerson, Richard, et al. . 2014. Individual and aggregate labor supply in a heterogeneous agent economy with intensive and extensive margins. Unpublished Manuscript. Chetty, Raj. 2012. Bounds on elasticities with optimization frictions: A synthesis of micro and macro evidence on labor supply. Econometrica, 80(3), 969–1018. Chetty, Raj, Guren, Adam, Manoli, Day, and Weber, Andrea. 2012. Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities. NBEr macroeconomics Annual. Chetty, Raj, Stepner, Michael, Abraham, Sarah, Lin, Shelby, Scuderi, Benjamin, Turner, Nicholas, Bergeron, Augustin, and Cutler, David. 2016. The association between income and life expectancy in the United States, 2001-2014. Jama, 315(16), 1750–1766. Choné, Philippe, and Laroque, Guy. 2014. Income tax and retirement schemes. Costa, Dora L. 1998. The evolution of retirement. Pages 6–31 of: The Evolution of Retirement: An American Economic History, 1880-1990. University of Chicago Press. Cremer, Helmuth, Lozachmeur, Jean-Marie, and Pestieau, Pierre. 2004. Social security, retirement age and optimal income taxation. Journal of Public Economics, 88(11), 2259–2281. De Nardi, Mariacristina. 2004. Wealth inequality and intergenerational links. The Review of Economic Studies, 71(3), 743–768. Deaton, Angus, and Paxson, Christina. 1994. Intertemporal choice and inequality. Journal of political economy, 102(3), 437–467. Di Nunno, Giulia, Øksendal, Bernt Karsten, and Proske, Frank. 2009. Malliavin calculus for Lévy processes with applications to finance. Vol. 2. Springer. Diamond, Peter Arthur, and Mirrlees, James A. 1978. A model of social insurance with variable retirement. Journal of Public Economics, 10(3), 295– 336. Dixit, Avinash. 1993. Art of Smooth Pasting. Vol. 55. Fundamentals of Pure and Applied Economics. Duval, Romain. 2004. Retirement behaviour in OECD countries: impact of oldage pension schemes and other social transfer programmes. OECD economic studies, 2003(2), 7–50. Farhi, Emmanuel, and Werning, Iván. 2013. Insurance and taxation over the life cycle. The Review of Economic Studies, 80(2), 596–635. French, Eric. 2005. The effects of health, wealth, and wages on labour supply and retirement behaviour. The Review of Economic Studies, 72(2), 395–427. Gelber, Alexander, Jones, Damon, Sacks, Daniel W, and Song, Jae. 2020. The employment effects of the social security earnings test. Journal of Human Resources. Golosov, Mikhail, and Tsyvinski, Aleh. 2006. Designing optimal disability insurance: A case for asset testing. Journal of Political Economy, 114(2), 257– 279. Golosov, Mikhail, and Tsyvinski, Aleh. 2015. Policy implications of dynamic public finance. economics, 7(1), 147–171. Golosov, Mikhail, Kocherlakota, Narayana, and Tsyvinski, Aleh. 2003. Optimal indirect and capital taxation. The Review of Economic Studies, 70(3), 569–587. Golosov, Mikhail, Troshkin, Maxim, and Tsyvinski, Aleh. 2016. Redistribution and social insurance. The American Economic Review, 106(2), 359–386. Gomes, Renato, Lozachmeur, Jean-Marie, and Pavan, Alessandro. 2017. Differential taxation and occupational choice. The Review of Economic Studies, rdx022. Greenwood, Jeremy, Hercowitz, Zvi, and Huffman, Gregory W. 1988. Investment, capacity utilization, and the real business cycle. The American Economic Review, 402–417. Grochulski, Borys, and Kocherlakota, Narayana. 2010. Nonseparable preferences and optimal social security systems. Journal of Economic Theory, 145(6), 2055–2077. Gruber, Jon, and Saez, Emmanuel. 2002. The elasticity of taxable income: evidence and implications. Journal of public Economics, 84(1), 1–32. Gruber, Jonathan, and Wise, David. 1998. Social security and retirement: An international comparison. The American Economic Review, 88(2), 158–163. Gruber, Jonathan, and Wise, David A. 2002 (December). Social Security Programs and Retirement Around the World: Micro Estimation. Working Paper 9407. National Bureau of Economic Research. Hansen, Gary D. 1993. The cyclical and secular behaviour of the labour input: Comparing efficiency units and hours worked. Journal of Applied Econometrics, 8(1), 71–80. Hartman, Philip. 2002. Ordinary differential equations. Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L. 2005. Two views of inequality over the life cycle. Journal of the European Economic Association, 3(2-3), 765–775. Heathcote, Jonathan, Perri, Fabrizio, and Violante, Giovanni L. 2010. Unequal we stand: An empirical analysis of economic inequality in the United States, 1967–2006. Review of Economic dynamics, 13(1), 15–51. Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L. 2014. Optimal tax progressivity: An analytical framework. Tech. rept. National Bureau of Economic Research. Hosseini, Roozbeh, and Shourideh, Ali. 2019. Retirement financing: An optimal reform approach. Econometrica, 87(4), 1205–1265. Huggett, Mark, and Parra, Juan Carlos. 2010. HowWell Does the US Social Insurance System Provide Social Insurance? Journal of Political Economy, 118(1), 76–112. Hurst, Erik. 2008. The retirement of a consumption puzzle. Tech. rept. National Bureau of Economic Research. Jacka, SD, and Lynn, JR. 1992. Finite-horizon optimal stopping, obstacle problems and the shape of the continuation region. Stochastics Stochastics Rep, 39(25-42). Jacquet, Laurence, Lehmann, Etienne, and Van der Linden, Bruno. 2013. Optimal redistributive taxation with both extensive and intensive responses. Journal of Economic Theory, 148(5), 1770–1805. Kapicka, Marek. 2013. Efficient allocations in dynamic private information economies with persistent shocks: A first-order approach. The Review of Economic Studies, rds045. Karabarbounis, Marios. 2016. A road map for efficiently taxing heterogeneous agents. American Economic Journal: Macroeconomics, 8(2), 182–214. Kleven, Henrik Jacobsen, and Schultz, Esben Anton. 2014. Estimating taxable income responses using Danish tax reforms. American Economic Journal: Economic Policy, 6(4), 271–301. Lazear, Edward P, and Moore, Robert L. 1988. Pensions and turnover. Pages 163–190 of: Pensions in the US Economy. University of Chicago Press. Leland, Hayne E. 1994. Corporate debt value, bond covenants, and optimal capital structure. The journal of finance, 49(4), 1213–1252. Makris, Miltiadis, and Pavan, Alessandro. 2017. Taxation under Learningby- Doing. Michau, Jean-Baptiste. 2014. Optimal redistribution: A life-cycle perspective. Journal of Public Economics, 111, 1–16. Mirrlees, James A. 1971. An exploration in the theory of optimum income taxation. The review of economic studies, 38(2), 175–208. Moser, Christian, and Olea de Souza e Silva, Pedro. 2019. Optimal paternalistic savings policies. Columbia Business School Research Paper. Munnell, Alicia H, and Soto, Mauricio. 2005. What replacement rates do households actually experience in retirement? Nishiyama, Shinichi, and Smetters, Kent. 2007. Does social security privatization produce efficiency gains? The Quarterly Journal of Economics, 122(4), 1677–1719. Pavan, Alessandro, Segal, Ilya, and Toikka, Juuso. 2014. Dynamic mechanism design: A myersonian approach. Econometrica, 82(2), 601–653. Peterman, William B. 2016. Reconciling micro and macro estimates of the Frisch labor supply elasticity. Economic Inquiry, 54(1), 100–120. Prescott, Edward C, Rogerson, Richard, and Wallenius, Johanna. 2009. Lifetime aggregate labor supply with endogenous workweek length. Review of Economic Dynamics, 12(1), 23–36. Reichling, Felix, and Whalen, Charles. 2012. Review of estimates of the Frisch elasticity of labor supply. Rogerson, Richard, and Wallenius, Johanna. 2013. Nonconvexities, retirement, and the elasticity of labor supply. The American Economic Review, 103(4), 1445–1462. Rogerson, William P. 1985. Repeated moral hazard. Econometrica: Journal of the Econometric Society, 69–76. Rothschild, Casey, and Scheuer, Florian. 2013. Redistributive taxation in the roy model. The Quarterly Journal of Economics, 128(2), 623–668. Ruggles, Steven, Flood, S, Goeken, R, Grover, J, Meyer, E, Pacas, J, and Sobek, M. 2018. IPUMS USA: Version 8.0 [dataset]. Minneapolis, MN: IPUMS. Rust, John P. 1989. A dynamic programming model of retirement behavior. Pages 359–404 of: The economics of aging. University of Chicago Press. Saez, Emmanuel. 2001. Using elasticities to derive optimal income tax rates. The review of economic studies, 68(1), 205–229. Saez, Emmanuel. 2002. Optimal income transfer programs: intensive versus extensive labor supply responses. The Quarterly Journal of Economics, 117(3), 1039–1073. Saez, Emmanuel, and Stantcheva, Stefanie. 2016. Generalized social marginal welfare weights for optimal tax theory. The American Economic Review, 106(1), 24–45. Sannikov, Yuliy. 2014. Moral hazard and long-run incentives. Unpublished working paper, Princeton University. Shourideh, Ali, and Troshkin, Maxim. 2015. Incentives and efficiency of pension systems. Tech. rept. Mimeo. Sicsic, Michaël, et al. . 2020. Does Labor Income React more to Income Tax or Means-Tested Benefit Reforms? Tech. rept. TEPP. Stantcheva, Stefanie. 2017. Optimal Taxation and Human Capital Policies over the Life Cycle. Journal of Political Economy, 125(6). Stantcheva, Stefanie. 2020. Dynamic Taxation. Tech. rept. National Bureau of Economic Research. Stock, James H, and Wise, David A. 1988. Pensions, the option value of work, and retirement. Storesletten, Kjetil, Telmer, Christopher I, and Yaron, Amir. 2004. Consumption and risk sharing over the life cycle. Journal of monetary Economics, 51(3), 609–633. Strack, P, and Kruse, T. 2013. Optimal stopping with private information. Tech. rept. Mimeo. Toossi, Mitra. 2015. Labor force projections to 2024: the labor force is growing, but slowly. Monthly Lab. Rev., 138, 1. Werning, Iván. 2011. Nonlinear capital taxation. Unpublished. http://dl. dropbox. com/u/125966/implimentation. pdf. Williams, Noah. 2011. Persistent private information. Econometrica, 79(4), 1233–1275. 58