DP3896 | The Macroeconomics of Early Retirement

Publication Date

25/05/2003

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Abstract

Early retirement represents a policy response to the appearance of a mass of redundant middle-aged workers, who were not entitled to a pension transfer in their old age. This policy is distortionary, since it reduces the incentive to accumulate human capital, hence decreasing economic growth: it shifts part of the tax burden on future generations. Why was it adopted? We suggest that alternative policies - which do not introduce long-term distortions, but impose a larger cost on the current young generation of workers - were blocked by the political opposition of a coalition of the extreme: high income workers, who did not plan to retire early, but sought to reduce the current tax burden, and low income workers, who expected to retire early and to benefit from the early retirement pension.