Pensions with early retirement and without commitment

Abstract

In this article it is shown that more generous early retirement provisions as well as lower employment lead to lower steady state pension rates if governments weigh the welfare of the older persons relatively strongly. A relatively stronger weight on the welfare of the young reverses the results. The driving force behind those findings are governments that cannot commit to pension policies and consequently take into account future governments' policies when maximizing electoral support from the currently young and old constituencies.

Acknowledgements

I would like to thank Volker Böhm and Achim Kemmerling for their suggestions. Financial support by the Deutsche Forschungsgemeinschaft (DFG) is highly acknowledged.

Notes

¹ There are highly recommendable surveys on the political economy of pension systems by Breyer (1994), Galasso and Profeta (2002) and Mulligan and Sala-i-Martin (1999).

² Such a government objective function can be rationalized with a probabilistic voting model (see Lindbeck and Weibull, 1987).