Retirement and social security The roles of self-fulfilling expectations and educational investments

• Published in: Economics of governance Vol. 12; no. 4; pp. 353 - 383
• Main Authors: Arawatari, Ryo, Ono, Tetsuo
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer-Verlag 01.12.2011; Springer; Springer Nature B.V
• Subjects: Age; Aged; Alterssicherung; Analysis; Anreiz; Bildungsverhalten; Early retirement; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Education; Elderly; Employment; Equilibrium; Erwerbstätigkeit; Expectations; Expected utility; Generation; Graduation rate; International Political Economy; Investment; Investments; Labor force; Labor Force Participation; Majorities; Numerical analysis; Original Paper; Political economy; Political Theory; Politische Ökonomie; Public Administration; Public Finance; Retirement; Social Security; Studies; Taxation; Taxes; Theorie; Ökonomie; Japan; Self-fulfilling expectations; Social security; H55; Political equilibrium; Retirement; D72; J26
• ISSN: 1435-8131; 1435-6104; 1435-8131
• DOI: 10.1007/s10101-011-0099-x

Countries with higher implicit taxes on continued work are associated with lower labor force participation rates of the elderly. This paper constructs a politico-economic model that accounts for this feature based on multiple, self-fulfilling expectations of agents. In this model, agents are identical at birth and can become skilled (or remain unskilled) through educational investment. When agents hold expectations of larger social security benefits, it provides a disincentive to engage in educational investment, thereby resulting in an unskilled majority. In turn, this unskilled majority supports larger social security benefits, which induces the retirement of the elderly and thus results in a lower labor force participation rate. The opposite applies when agents have expectations of smaller social security benefits in their old age.