Flexible Retirement and Optimal Taxation
76 Pages Posted: 14 Dec 2018 Last revised: 29 Apr 2020
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Flexible Retirement and Optimal Taxation
Date Written: November, 2017
Abstract
This paper studies optimal insurance against private idiosyncratic shocks in a life-cycle model with intensive labor supply and endogenous retirement. In this environment, the optimal labor tax is hump-shaped in age: insurance benefits of taxation push for increasing-in-age taxes while rising labor supply elasticities and optimal late retirement of highly productive workers push for lowering taxes for old workers. In calibrated numerical simulations, the optimum achieves sizable welfare gains that age-dependent taxes do not deliver under the status quo US Social Security. Nevertheless, an optimal combination of age-dependent linear taxes with increasing-in-age retirement benefits generates welfare gains close to optimal.
Keywords: Retirement, Optimal Taxation, Social Security, Continuous- Time, Optimal Stopping
JEL Classification: H21, H55, J26
Suggested Citation: Suggested Citation