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Limited computational ability and social security

  • Frank Caliendo
  • T. Findley

    ()

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

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File URL: http://hdl.handle.net/10.1007/s10797-012-9231-2
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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 20 (2013)
Issue (Month): 3 (June)
Pages: 414-433

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Handle: RePEc:kap:itaxpf:v:20:y:2013:i:3:p:414-433
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  1. Matthew Chambers & Carlos Garriga, 2005. "Accounting for Changes in the Homeownership Rate," Computing in Economics and Finance 2005 304, Society for Computational Economics.
  2. Frank N. Caliendo & Emin Gahramanov, 2008. "Hunting the Unobservables for Optimal Social Security: A General Equilibrium Approach," Economics Series 2008_10, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  3. Lawrence Kotlikoff & Avia Spivak & Lawrence H. Summers, 1980. "The Adequacy of Savings," Cowles Foundation Discussion Papers 569, Cowles Foundation for Research in Economics, Yale University.
  4. Kevin Huang & Frank Caliendo, 2011. "Rationalizing multiple consumption-saving puzzles in a unified framework," Frontiers of Economics in China, Springer, vol. 6(3), pages 359-388, September.
  5. Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2000. "Do the Rich Save More?," NBER Working Papers 7906, National Bureau of Economic Research, Inc.
  6. T. Findley & Frank Caliendo, 2009. "Short horizons, time inconsistency, and optimal social security," International Tax and Public Finance, Springer, vol. 16(4), pages 487-513, August.
  7. Martin Feldstein, 1982. "The Optimal Level of Social Security Benefits," NBER Working Papers 0970, National Bureau of Economic Research, Inc.
  8. CREMER, Helmuth & PESTIEAU, Pierre, . "Myopia, redistribution and pensions," CORE Discussion Papers RP -2269, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Kumru, Çagri S. & Thanopoulos, Athanasios C., 2008. "Social security and self control preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 757-778, March.
  10. Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 2003. "Time-Inconsistent Preferences And Social Security," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 745-784, May.
  11. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages S164-S187, February.
  12. Bucciol, Alessandro, 2011. "A Note On Social Security Welfare With Self-Control Problems," Macroeconomic Dynamics, Cambridge University Press, vol. 15(04), pages 579-594, September.
  13. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
  14. Thaler, Richard H, 1994. "Psychology and Savings Policies," American Economic Review, American Economic Association, vol. 84(2), pages 186-92, May.
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