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Designing a linear pension scheme with forced savings and wage heterogeneity

  • Helmuth Cremer
  • Philippe Donder
  • Dario Maldonado
  • Pierre Pestieau

    ()

This paper studies the optimal linear pension scheme when society consists of rational and myopic individuals. Myopic individuals have, ex ante, a strong preference for the present even though, ex post, they would regret not to have saved enough. While rational and myopic persons share the same ex post intertemporal preferences, only the rational agents make their savings decisions according to these preferences. Individuals are also distinguished by their productivity. The social ob jective is “paternalistic”: the utilitarian welfare function depends on ex post utilities. We examine how the presence of myopic individuals affects both the size of the pension system and the degree of redistribution it operates. The relationship between proportion of myopic individuals and characteristics of the pension system turns out to be much more complex than one would have conjectured. Neither the impact on the level of pensions nor the effect on their redistributive degree are unambiguous. Nevertheless, we show that under some plausible assumptions adding myopic individuals increases the level of pension benefits and leads to a shift from a flat or even targeted scheme to a partially contributory one. However, we also provide an example where the degree of redistribution is not a monotonic function of the proportion of myopic individuals.

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File URL: http://hdl.handle.net/10.1007/s10797-007-9031-2
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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 15 (2008)
Issue (Month): 5 (October)
Pages: 547-562

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Handle: RePEc:kap:itaxpf:v:15:y:2008:i:5:p:547-562
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  1. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
  2. Martin Feldstein, 1982. "The Optimal Level of Social Security Benefits," NBER Working Papers 0970, National Bureau of Economic Research, Inc.
  3. Ted O' Donoghue and Matthew Rabin., 2000. "Choice and Procrastination," Economics Working Papers E00-281, University of California at Berkeley.
  4. Homburg, Stefan, 2000. "Compulsory savings in the welfare state," Journal of Public Economics, Elsevier, vol. 77(2), pages 233-239, August.
  5. Helmut Cremer & Philippe De Donder & Dario Maldonado & Pierre Pestieau, 2007. "Voting over type and generosity of a pension system when some individuals are myopic," Working Papers 23283, Institut National de la Recherche Agronomique, France.
  6. CREMER, Helmuth & DE DONDER, Philippe & MALDONADO, Dario & PESTIEAU, Pierre, 2008. "Forced saving, redistribution and nonlinear social security schemes," CORE Discussion Papers 2008020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. PESTIEAU, Pierre & POSSEN, Uri, 2006. "Prodigality and myopia. Two rationales for social security," CORE Discussion Papers 2006073, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
    • Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  9. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 4, number 4.
  10. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
  11. Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 2000. "Time inconsistent preferences and Social Security," Discussion Paper / Institute for Empirical Macroeconomics 136, Federal Reserve Bank of Minneapolis.
  12. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 3, number 3.
  13. Summers, Lawrence H, 1989. "Some Simple Economics of Mandated Benefits," American Economic Review, American Economic Association, vol. 79(2), pages 177-83, May.
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