Economics serving society

Fair retirement under risky lifetime

Marc Fleurbaey, Marie-Louise Leroux, Pierre Pestieau and Gregory Ponthière

The increase in life expectancy has been a major achievement of our societies, but such demographic change raises questions about the financial sustainability of retirement schemes. In the last few decades, several reforms have been introduced in France and elsewhere in Europe, raising the age at which people are entitled to retire. These reforms have often been defended simply on the basis of their financial sustainability, without consideration for their social justice aspect.
In this article, Fleurbaey, Leroux, Pestieau and Ponthière study the definition of a just retirement age in an economy in which length of life is uncertain and there is inequality in life expectancy. They compare a hypothetical laissez-faire situation in which the state allows markets to operate freely, with a situation in which the allocation maximises the well-being attained by the least well-off (maximin ex post). The term “attained” is important here because the authors’ approach differs from ex ante approaches that aim to equalise the level of well-being that people expect, but ignore what they actually attain (especially in terms of life expectancy). In contrast, an ex post egalitarian approach places priority on individuals who die prematurely, that is, before they can profit from retirement (regardless of their earlier hopes of life expectancy). The principal result of the study is that under the optimal conditions of ex post egalitarianism (1) the optimal retirement age is in general higher than it is under laissez-faire conditions. This result advances an egalitarian argument in favour of raising the retirement age. The assumption is the following: part of the population dies before reaching retirement age, however these people are only identifiable after the fact. If we want to improve the lives of those who die prematurely, the only way to proceed is to transfer, within the total population, resources away from older age towards younger age. These transfers, which lead to a consumption profile that decreases with age, improve the lives of those who die before reaching retirement age, despite the impossibility of first identifying those people.
Given that the form of these transfers depends on the total resources available in an economy, it follows that raising the age of retirement allows, by freeing up additional resources, an increase in consumption for younger people, which leads to an increase in the well-being of those who, unfortunately, die before reaching retirement age.
(1) The hypothetical ideal situation constitutes a social goal, on the basis of which optimal public policy is defined.
Original title of the article : “Fair retirement under risky lifetime”
Forthcoming: International Economic Review
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