Harsh occupations, life expectancy and social security

Pierre Pestieau and Maria Racionero

We study the optimal design of a social security system when individuals differ in longevity and occupation. The occupations are given and yield the same wage. Longevity is private information. We show that there is a case for differentiating the pension policy by occupation when longevity is imperfectly correlated with occupation. The short-lived workers in the safe occupation are however often made worse-off, even when the social objective incorporates weights to redress the implicit redistribution from short- to long-lived individuals that the unweighted utilitarian objective entails. In the maximin solution all short-lived workers achieve the same utility with those in the safe occupation consuming the most when young and retiring the earliest. This is achieved by taxing - often quite heavily - their savings and their earnings from prolonging activity.

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