The Return on Social Security with Increasing Longevity

In this paper I study the impact of increasing longevity on pay-as-you-go pension systems. First, I show that increasing longevity increases their internal rate of return. The size of the effect di ers for di erent policy regimes. It is higher for the case where the retirement age is increased in order to keep the system in balance than for the case where the necessary adjustment is achieved by reducing pension bene ts. Second, I study optimally chosen retirement decisions and I show that the socially optimal policy involves a shorter working life than the private optimum. The social optimum can be implemented by the use of a PAYG system that combines an actuarial and a at pension.