Optimal Redistributive Pensions with Temptation and Costly Self-Control
AbstractWe characterize an optimal redistributive pension scheme when individuals exert costly self-control in the face of temptation. We revisit the idea that this scheme reduces the cost of self-control. Individuals are heterogenous in both the intensity of their self-control problems and their productivity. Pensions simultaneously have three effects: redistributing income across retirees, forcing workers to save, and influencing the cost of exerting self-control. In the optimal policy, the effect of taxation on the cost of self-control is fundamentally related to the redistributive level of the pension system. Proportional pension taxation has an adverse effect on the mental of self-control when temptation declines with income. This partially offsets the forced-saving benefits of the system, and call for a more redistributive scheme. If temptation increases with income, taxation unambiguously reduces the cost of self-control only if the benefit structure taxes individuals for their contributions. Otherwise, taxation also increases such cost, unless the temptation problem is of weak intensity. This negative welfare effect gets worse when the intensity of self-control problems increases. These results contrasts with a first best optimum, where the mental cost of self-control is driven to zero and consumption is smoothed across periods.
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Bibliographic InfoPaper provided by Queen's University, Department of Economics in its series Working Papers with number 1311.
Length: 32 pages
Date of creation: Aug 2013
Date of revision:
Taxation; Redistribution; Pensions; Self-Control;
Find related papers by JEL classification:
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
This paper has been announced in the following NEP Reports:
- NEP-AGE-2013-08-10 (Economics of Ageing)
- NEP-ALL-2013-08-10 (All new papers)
- NEP-PBE-2013-08-10 (Public Economics)
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