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Optimal social security tax with myopic agents

Author

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  • Chu, Hsun
  • Cheng, Chu-chuan

Abstract

Myopic agents lack the foresight to save for their own old age. It is generally believed that correcting myopia is a rationale for a pay-as-you-go (PAYG) pension system. This view has been supported by existing literature showing that the optimal PAYG social security tax should increase when people are more myopic. In this paper we obtain new results opposed to the traditional view. By establishing a very standard general equilibrium OLG model with myopic agents and endogenized marginal product of capital, we show that the optimal social security tax should be lower when people are more myopic. Our numerical analysis also shows that the welfare cost of the social security tax increases with people's degree of myopia. These results suggest that correcting myopia is not a clear rationale for the PAYG social security.

Suggested Citation

  • Chu, Hsun & Cheng, Chu-chuan, 2019. "Optimal social security tax with myopic agents," Economic Modelling, Elsevier, vol. 80(C), pages 320-327.
    • Handle: RePEc:eee:ecmode:v:80:y:2019:i:c:p:320-327
    DOI: 10.1016/j.econmod.2018.11.017
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    Cited by:

    1. Wenguang Yu & Fei Wang & Qianshun Sang & Qi Wang & Yixin Gao & Yujuan Huang & Xinliang Yu & Jinrui Xiao & Huilin Zhu & Chaoran Cui, 2020. "Construction and Analysis of Actuarial Model of the Influence of Personal Tax Deferred Commercial Pension Insurance on Personal Pension Wealth in China," Mathematics, MDPI, vol. 8(12), pages 1-23, November.
    2. Del Rey, Elena & Lopez-Garcia, Miguel-Angel, 2020. "On government-created credit markets for education and endogenous growth," Economic Modelling, Elsevier, vol. 92(C), pages 170-179.
    3. Bandyopadhyay, Debasis & La Pere, Anatoly, 2020. "Raising productivity with pension premium," Economic Modelling, Elsevier, vol. 92(C), pages 295-308.
    4. Day, Creina & Day, Garth, 2021. "Aging, voters and lower income tax: A role for pension design," Economic Modelling, Elsevier, vol. 94(C), pages 560-569.

    More about this item

    Keywords

    PAYG pensions; Myopic behaviors; Social security tax;
    All these keywords.

    JEL classification:

    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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