Age-Targeted Income Taxation, Labor Supply, and Retirement

Abstract

This paper studies the life-cycle effects of favorable marginal tax treatment of older workers on their optimal life cycle labor supply, retirement timing, and savings. I develop a structural model in continuous time where the life-cycle of a representative agent is divided into three distinct phases: pre-treatment, post-treatment, and retirement. Solutions for consumption/savings, labor supply/leisure, and retirement timing are then obtained by solving the model as a salvage value problem. I then calibrate the model to Swedish earnings data and find that the increased extensive margin labor supply is partially offset by a reduction in hours worked during the pre-treatment period. The total effect is however an increase in life-cycle labor supply and consumption.

Public pension policy and the equity–efficiency trade‐off∗

“…12 This is essentially a generalization of a two-stage control problem as outlined inKamien and Schwartz (2012). A three-stage optimal control problem is also illustrated and solved as a generalized salvage value problem inGustafsson (2021).c 2022 The Author. The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of Föreningen för utgivande av the SJE.…”