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Federal Reserve Bank of Chicago
Working Paper Series
Flexible Retirement and Optimal Taxation
Abdoulaye Ndiaye

This paper studies optimal insurance against private idiosyncratic shocks in a life-cycle model with intensive labor supply and endogenous retirement. In this environment, the optimal labor tax is hump-shaped in age: insurance benefits of taxation push for increasing-in-age taxes while rising labor supply elasticities and optimal late retirement of highly productive workers push for lowering taxes for old workers. In calibrated numerical simulations, the optimum achieves sizable welfare gains that age-dependent taxes do not deliver under the status quo US Social Security. Nevertheless, an optimal combination of age-dependent linear taxes with increasing-in-age retirement benefits generates welfare gains close to optimal.

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Abdoulaye Ndiaye, Flexible Retirement and Optimal Taxation, Federal Reserve Bank of Chicago, Working Paper Series WP-2018-18, 03 Nov 2017, revised 05 Nov 2018.
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Keywords: Retirement; Optimal Taxation; Social Security; Continuous- Time; Optimal Stopping
DOI: 10.21033/wp-2018-18
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