Group for Research in Decision Analysis

Crowding out, public pensions and employer provided pensions: A Stackelberg game

Francisco Cabo Universidad de Valladolid, Spain

Retirees with heterogeneous pre-retirement wages receive a public pension from the Social Security and a private pension from the employer. While the former discriminates against high-wage employees, a private pension integrated with the Social Security counterbalances this tilt. The public debt, generated by the accumulation of deficits in the public pension system, is financed by the government with higher taxes or lower public expenses. Furthermore, the crowding-out effect links high levels of public debt with large interest rates, which represents a direct cost for the firm. A Stackelberg leadership model analyzes the dynamic interaction between the government and the employer which differently value retirement pensions and the public debt.