This paper deals with two policy approaches to address the problem of the “pensions time
bomb” by influencing private-sector pension provision. In assessing the role of private-sector
pensions, it is common to concentrate exclusively on the issue of whether early retirement
penalties or late retirement benefits are actuarially fair. We argue that this focus is
unbalanced since private-sector pension arrangements have significant implications for
governments' finances. When private pensions encourage early retirement, they reduce the
number of people paying taxes and increase the number of people supplementing their
private pensions through various forms of public support. To induce private-sector pension
providers to internalize this externality, we examine two policy responses: taxing private
pension receipts of early retirees, and issuing “early retirement rights.” The government’s
receipts from the pension taxes or the sale of early retirement rights are used, in part, to
provide employment vouchers for people of pensionable age.
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