Optimal Funded Pension for Consumers With Heterogeneous Self‐Control

This study designs an optimally funded pension scheme for consumers with self‐control problems. The model assumes that consumers' self‐control costs are private information and that they can borrow against their future pension benefits. Pension plans are offered to consumers to maximize social welfare, including self‐control costs. Results demonstrate that, under certain assumptions, a fully funded pension scheme with benefits equal to the return on contributions is Pareto efficient and satisfies the incentive compatibility constraint. Under this scheme, consumers more likely to feel temptation choose smaller premiums. In implementing this scheme, the government does not even need to know the distribution of types.