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Short horizons, time inconsistency, and optimal social security

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  • T. Findley

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  • Frank Caliendo

Abstract

We study the optimal provision of social security in a dynamically efficient economy using a continuous-time overlapping-generations model in which consumers have short planning horizons. The short-horizon mechanism leads to dynamic optimization that is time-inconsistent over the life cycle. Our calibrated general-equilibrium results are generally supportive of social security for a wide array of social welfare functions. Thus, the basic life-cycle model can be augmented with only this slight twist in order to rationalize a social security program with the current U.S. tax rate. Copyright Springer Science+Business Media, LLC 2009

Suggested Citation

  • T. Findley & Frank Caliendo, 2009. "Short horizons, time inconsistency, and optimal social security," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(4), pages 487-513, August.
  • Handle: RePEc:kap:itaxpf:v:16:y:2009:i:4:p:487-513
    DOI: 10.1007/s10797-009-9115-2
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Cremer, Helmuth & Pestieau, Pierre, 2011. "Myopia, redistribution and pensions," European Economic Review, Elsevier, vol. 55(2), pages 165-175, February.
    2. Frank Caliendo & T. Findley, 2013. "Limited computational ability and social security," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(3), pages 414-433, June.
    3. Feigenbaum, James, 2008. "Can mortality risk explain the consumption hump?," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 844-872, September.
    4. Farzin, Y. Hossein & Wendner, Ronald, 2014. "The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning," MPRA Paper 54614, University Library of Munich, Germany.
    5. Findley, T. Scott & Caliendo, Frank N., 2014. "Interacting mechanisms of time inconsistency," Journal of Economic Psychology, Elsevier, vol. 41(C), pages 68-76.
    6. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
    7. Bagchi, Shantanu, 2015. "Labor supply and the optimality of Social Security," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 167-185.
    8. Caliendo, Frank N. & Findley, T. Scott, 2013. "Time inconsistency and retirement planning," Economics Letters, Elsevier, vol. 121(1), pages 30-34.
    9. András Simonovits, 2015. "Socially optimal contribution rate and cap in a proportional (DC) pension system," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 14(1), pages 45-63, December.
    10. Guo, Nick L. & Caliendo, Frank N., 2014. "Time-inconsistent preferences and time-inconsistent policies," Journal of Mathematical Economics, Elsevier, vol. 51(C), pages 102-108.
    11. Gahramanov, Emin & Tang, Xueli, 2013. "A mixed blessing of lifespan heterogeneity," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 142-153.
    12. Voß, Achim & Lingens, Jörg, 2014. "What's the damage? Environmental regulation with policy-motivated bureaucrats," CAWM Discussion Papers 67, University of Münster, Center of Applied Economic Research Münster (CAWM).
    13. Caliendo, Frank N., 2011. "Time-inconsistent preferences and social security: Revisited in continuous time," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 668-675, May.
    14. Gahramanov, Emin, 2013. "Survival misperception, time inconsistency, and implications for life-cycle saving and welfare," Economic Modelling, Elsevier, vol. 32(C), pages 539-550.
    15. T. Findley & Frank Caliendo, 2008. "The behavioral justification for public pensions: a survey," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 32(4), pages 409-425, October.
    16. Simonovits, András & Király, Balázs, 2016. "Megtakarítás és adózás egy önkéntes nyugdíjrendszerben - ágensalapú modellezés
      [Saving and taxation in a voluntary pension system: Towards an agent-based model]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 473-500.
    17. Balazs Kiraly & Andras Simonovits, 2016. "Saving and taxation in a voluntary pension system: Toward an agent-based model," IEHAS Discussion Papers 1606, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    18. Spiro, Daniel, 2014. "Resource prices and planning horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 159-175.
    19. Frank Caliendo & Emin Gahramanov, 2013. "Myopia and pensions in general equilibrium," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(3), pages 375-401, July.
    20. Cheng, Chu-Chuan & Chu, Hsun, 2017. "Optimal Policies for Sin Goods and Health Care: Tax or Subsidy?," MPRA Paper 80183, University Library of Munich, Germany.
    21. Gahramanov Emin, 2016. "On the Demographics and the Severity of the Social Security Crisis," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 1001-1028, April.

    More about this item

    Keywords

    Short planning horizons; Time-inconsistent preferences; Social security; Optimal taxation; Dynamic optimization; Life-cycle consumption; Dynamic welfare analysis; H55; D91; C61;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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