Optimal Public Pensions: Full Coverage for End-of-Life Consumption

Public pensions and private saving are commonly considered complementary funding sources from which the elderly should draw simultaneously throughout their retirement. This paper shows that sequential use of funding sources would be significantly more effi cient —a period of entirely private funding followed by a period of consumption fully financed by public pensions. Thus the standard multi-pillar approach to retirement requires rethinking. Implied is a sharp distinction between the age of retirement– a matter of personal preferences and resources—and the age of eligibility for public pensions. The analysis also implies that changes in longevity and in funding levels are optimally absorbed by gradual adjustments in the eligibility age, leaving annual payments largely unchanged. ∗Department of Economics, NH 2127, UCSB, Santa Barbara, CA 93106. Email: [email protected]. Home page: www.econ.ucsb.edu/~bohn.