DP4774 | Retirement Age and Health Expenditures

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This Paper studies the design of pension benefits and contributions when an individual?s health status (disutility of continued activity) is endogenous and depends on consumption of health services. Health services can be subsidized (in a linear or non-linear way, depending on the information structure). Uniform public provision of health services is also considered. We show that as with exogenous health status, the second-best policy may induce early retirement for some types of individuals. Furthermore, whatever the specific information structure considered (individual levels or anonymous transactions) for health services, a subsidization of health expenditures obtains under fairly plausible assumptions. Third, when the information structure permits only linear subsidies, the case for uniform public provision of health services (which can be supplemented but not resold) appears to be quite strong.