Age Before Beauty? Productivity and Work vs. Seniority and Early Retirement

Abstract

We show how the age profile of earnings, retirement rules and retirement behavior are tightly linked through the general equilibrium of the economy. Generous Social Security benefits financed by large Social Security taxes discourage human capital accumulation. In Social Security systems where Social Security benefits prioritize redistribution less productive workers with lower levels of human capital tend to retire earlier. These outflows of workers from the labor force tend to generate wage profiles that are monotonically increasing over age and labor markets that display larger seniority premia. This paper theoretically rationalizes the links between retirement rules and the wage structures over the life cycle and uses data on European countries to show how social security taxes, the age profile of earnings, and retirement behavior are related.

Keywords: social security tax, early retirement, age prole of earnings, human capital, seniority premium

JEL Classification: H53, H55, D72