Redistribution with Unequal Life Expectancy
By Sebastian Köhne
I study life-expectancy inequality in a Mirrleesian life-cycle framework with pension-linked fiscal externalities and private retirement saving. Heterogeneous longevity affects optimal redistribution by changing both the expected fiscal cost of pension benefits and the mapping from disposable income into social marginal welfare. I derive an ABCD optimal tax formula that incorporates these efficiency and equity effects. Calibrated to the U.S. economy, the model implies that accounting for heterogeneous longevity lowers optimal marginal tax rates, particularly at the bottom of the income distribution. These reductions generate welfare losses for the lowest-income types and welfare gains for most other earners, peaking at middle incomes.
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