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Limited computational ability and social security

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  • Frank Caliendo
  • T. Findley

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Abstract

We revisit the role of social security in countering inadequate saving for retirement. We compute the optimal social security tax rate for households who lack the computational ability to solve dynamic optimization problems. Instead, they follow the simple rule of thumb of consuming and saving a fixed fraction of disposable income. This departs from the tradition of computing the optimal tax rate when households suffer from some type of behavioral bias yet possess the ability to solve dynamic optimization problems. Our general equilibrium model is calibrated to the moments of the distribution of saving rates in the US, and our results are generally supportive of a social security program as large as the one in the US. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • 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.
  • Handle: RePEc:kap:itaxpf:v:20:y:2013:i:3:p:414-433 DOI: 10.1007/s10797-012-9231-2
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    File URL: http://hdl.handle.net/10.1007/s10797-012-9231-2
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    References listed on IDEAS

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    5. T. Findley & Frank Caliendo, 2009. "Short horizons, time inconsistency, and optimal social security," International Tax and Public Finance, Springer;International Institute of Public Finance, pages 487-513.
    6. Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2009. "Accounting For Changes In The Homeownership Rate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 677-726, August.
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    Cited by:

    1. Volker Grossmann & Holger Strulik, 2015. "Optimal Social Insurance and Health Inequality," CESifo Working Paper Series 5604, CESifo Group Munich.
    2. 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.

    More about this item

    Keywords

    Rule-of-thumb consumption and saving; Optimal social security; General equilibrium calibration; C61; D91; H55;

    JEL classification:

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

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