Flexible Retirement and Optimal Taxation

76 Pages Posted: 14 Dec 2018 Last revised: 29 Apr 2020

See all articles by Abdoulaye Ndiaye

Abdoulaye Ndiaye

New York University (NYU) - New York University

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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

Ndiaye, Abdoulaye, Flexible Retirement and Optimal Taxation (November, 2017). FRB of Chicago Working Paper No. WP-2018-18, Available at SSRN: https://ssrn.com/abstract=3301236 or http://dx.doi.org/10.21033/wp-2018-18

Abdoulaye Ndiaye (Contact Author)

New York University (NYU) - New York University ( email )

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