Introducing retirement flexibility in a population with heterogeneous agents

In this paper we investigate the introduction of flexible retirement in case of heterogeneous agents with different life expectancies. Flexible retirement can help finance pensions when it induces individuals to extend their careers. We define flexible retirement as the opportunity for individuals to choose their own moment of retirement without (large) distortions. In our model we introduce flexible retirement in combination with flexible pensions. The introduction of flexible pensions can be an important step in facilitating flexible retirement. Based on the literature we discuss the importance of flexible pensions for making retirement flexible. Flexible pensions can come with a selection problem. When individuals differ in life expectancy and governments only allow the use of an uniform accrual rate for postponing benefits, flexible pensions can be used by some participants to improve their net benefit from pensions. In our model the effect of flexible retirement on second period labour supply depends on the chosen value of leisure, because the value of leisure of individuals is unclear we can not say what the effect of flexible retirement on second period labour supply is. Only allowing late retirement is possibly a better measure to increase second period labour supply, however this does not enable individuals with a high preference for leisure or a low life expectancy to retire at their preferred retirement age.