Social Security Rules, Human Capital Formation and Retirement Patterns
Public pension systems are under increased stress in all developed countries. During the last four decades, life expectancy has increased, and labor force participation, especially among older men, has decreased significantly. Gruber and Wise (1999) report empirical evidence linking retirement patterns closely to social security rules, suggesting that provisions favoring early retirement are to a large extent responsible for reduced labor market participation and financial distress facing social security systems in the coming decades. Early retirement creates a double burden for the social security system, by simultaeously reducing contributions and increasing expenditures in the absence of full actuarial adjustment. In addition to entitlement age, social security systems differ in two dimensions. In "Bismarckian" systems pension are earnings-related, while in "Beveridgean" systems they are flat-rate. Another crucial feature of a social seurity system i whether or not it offers actuarial adjustment. With actuarial adjustment, the net present value of lifetime social security benefits does not depend on retirement behavior.