Document Type

Working Paper

Publication Date

11-26-2003

Working Paper Number

WP #03022, October 2001 revised July 2003 revised November 2003; Old working paper #10681

Abstract

Many countries around the world have large public pension programs. Traditionally, these programs have been used to induce retirement by the elderly in order to free up jobs for the young and to redistribute income across generations. This paper provides an efficiency rationale for the inter-generational income redistribution focus of such programs in a framework which explicitly accounts for the role of the lifecycle as well as search and matching frictions in the labor market. In our model, public pension programs alter the age composition of the labor force by inducing the jobless elderly to retire. By requiring a long history of labor market attachment in order to receive benefits, these programs raise the future value of current employment for the young which serves to redistribute bargaining power, and hence income, from the young to the old. The paper argues that pension programs through their effect on the wage structure, the age distribution of the labor force and firm entry decisions, can improve the operation of the labor market and might therefore be desirable on efficiency grounds alone (abstracting from equity and insurance motives). It shows that a pension program that is funded from within the economy can lead to higher welfare than having no pension program at all.

JEL Classification

J41, J64, E24

File Format

application/pdf

Length

42 pages

File Function

Current version: November 2003 (First version: October 2001)

Included in

Economics Commons

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