Question

1 Gruber 13.1: Retirement Reforms (8 points) The government of Westlovakia has just reformed its social security system. This reform changed two aspects of the system: (1) it abolished its actuarial reduction for early retirement, and (2) it reduced the payroll tax by half for workers who continued to work beyond the early retirement age. Will the average retirement age for Weslovakian workers increase or decrease in response to these two changes, or can't you tell? Explain.

Answer 1

The first policy change, abolishing the actuarial reduction ,will reduce the average retirement age.A decrease in the payroll tax would increase the value of social security for younger workers in comparison to older workers.Older workers would not benefit as they will not have a very secure plan and they will have to pay at higher rate for along period.Younger workers will not have to pay at a higher rate for many years and will benefit.