Optimal redistribution: A life-cycle perspective

• I characterize the optimal life-cycle redistribution policy.
• The extensive margin corresponds to the choice of a retirement age.
• Higher productivity individuals should have longer careers.
• Implementing the optimal policy in the U.S. can generate large social welfare gains.
• The optimal allocation is implementable with and without private savings.

In this paper, I characterize the optimal redistribution policy in a simple life-cycle framework with both an intensive and an extensive margin of labor supply. The extensive margin corresponds to the choice of a retirement age. The optimal allocation cannot be implemented in a decentralized economy by a standard non-linear income tax alone. It can however be implemented by a history-dependent social security system which redistributes resources across agents. A calibration of the model to the U.S. economy reveals that the retirement age should optimally be sharply increasing in productivity and that implementing the optimal life-cycle redistribution policy can generate large social welfare gains.