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Optimal taxes and pensions in a society with myopic agents

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  • Kerstin Roeder

    ()
    (Universität Augsburg)

Abstract

This paper derives the optimal pension and tax parameters in a society where individuals differ in two characteristics: rationality and productivity. Rational agents, if not liquidity constrained, smooth consumption over their life-cycle. Myopic agents, by contrast, have ex ante a strong preference for the present and undertake no savings, even though, ex post they regret their decision. Given a paternalistic social objective aiming at maximizing the sum over ex post utilities, this paper shows how both transfer systems interact in their degree of redistribution and generosity. Moreover, it reveals how the optimal policy parameters change if capital markets are imperfect, implying that agents cannot borrow against their retirement benefits. Analytical and numerical results show that in some cases only one transfer system prevails.

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Bibliographic Info

Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2009/28.

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Length: 34 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ieb:wpaper:2009/10/doc2009-28

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Keywords: Social security; redistributive taxation; myopia; credit constraints;

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  1. Feldstein, Martin S, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(2), pages 303-20, May.
  2. Cigno, Alessandro, 2006. "Is There a Social Security Tax Wedge?," IZA Discussion Papers 1967, Institute for the Study of Labor (IZA).
  3. Helmuth Cremer & Philippe De Donder & Darío Maldonado & Pierre Pestieau, 2008. "Forced Saving, Redistribution and Nonlinear Social Security Schemes," CESifo Working Paper Series 2325, CESifo Group Munich.
  4. Monika BÜTLER, 2000. "Tax-Benefit Linkages in Pension Systems (a note)," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 00.20, Université de Lausanne, Faculté des HEC, DEEP.
  5. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  6. Hamermesh, Daniel S, 1984. "Consumption during Retirement: The Missing Link in the Life Cycle," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 1-7, February.
  7. Louis Kaplow, 2006. "Myopia and the Effects of Social Security and Capital Taxation on Labor Supply," NBER Working Papers 12452, National Bureau of Economic Research, Inc.
  8. Mathias Kifmann, 2004. "Age-dependent taxation and the optimal retirement benefit formula," Working Papers of the Research Group Heterogenous Labor, Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim 04-20, Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim.
  9. Schwarz, Mordechai E. & Sheshinski, Eytan, 2007. "Quasi-hyperbolic discounting and social security systems," European Economic Review, Elsevier, Elsevier, vol. 51(5), pages 1247-1262, July.
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