An ageing population in modern societies has put stress on public
pension systems. To prevent Social Security deficits from increasing to
unbounded stocks of public debt we focus on two policies: reducing the
generosity of pension benefits, determined by the government, and post-
poning the effective retirement age, chosen by employees. An atomistic
employee would disregard the effect of his retirement decision on the public
debt and would retire as soon as possible. Conversely, an ideal farsighted
agency considering all current and future employees would postpone re-
tirement, thereby alleviating the pressure on public debt and allowing
for a more generous long-run pension. The government may design a
proper incentive strategy to induce myopic atomistic decision-makers, to
act non-myopically. This strategy is a two-part incentive with non-linear
dependence on the stock of public debt. It is credible if deceiving em-
ployees slightly adjust their retirement age decisions to increments in the
public debt.
