Employment, Leisure and Pension : Incentives with Limits

This paper considers two characteristics of a public pension system: the contribution rate and the lenght of employment. A simple family of optimization models is set up, where the instantaneous utility is a Cobb-Douglas-function of consumption and leisure, futhermore, the life-time utility is a CES-function of the instantaneous utility. We assume that at every instant the individual either works with full capacity or does not work at all. Furthermore, the individuals' parameter values (e.g. of the elasticity of utility with respect to consumption and the expected life span) differ from the government's ones. First the government calculates its optimal contribution rate and length of employment. That optimal rate is to be paid by the individuals but each can choose how many years he works-for a "proportional" benefit. Since government's actuaries calculate with the average life expectancy, people, correctly expecting to live longer/shorter than average, receive then more/less than they would deserve. This unfairness can only be mitigated by dampened incentives