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Myopia and pensions in general equilibrium

  • Frank Caliendo

    ()

  • Emin Gahramanov

The US social security tax rate has doubled in the last half century. Does the degree of myopic behavior that we observe in the US justify the size of the social security program? To study this question we build a computable general equilibrium model that is composed of life-cycle permanent-income consumers who save optimally and “hand-to-mouth” consumers who just consume their disposable income. Our model is a continuous-time, general equilibrium extension of the model by Cremer et al. (Int Tax Public Financ 15(5):547–562, 2008 ), though we abstract from the redistributive function of social security to focus on myopia. Retirement is a choice variable in our model and the social security program is designed to mimic the US program in which the annuity value of benefits increases with the retirement age. Also, we allow for delayed claiming beyond the date of retirement. The model matches a variety of important data targets relating to saving and retirement. We find that small reductions in the social security tax rate provide significant welfare gains to both groups of consumers. Copyright Springer Science+Business Media, LLC 2013

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File URL: http://hdl.handle.net/10.1007/s12197-011-9187-6
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Article provided by Springer & Academy of Economics and Finance in its journal Journal of Economics and Finance.

Volume (Year): 37 (2013)
Issue (Month): 3 (July)
Pages: 375-401

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Handle: RePEc:spr:jecfin:v:37:y:2013:i:3:p:375-401
DOI: 10.1007/s12197-011-9187-6
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  1. Ayşe İmrohoroğlu & Selahattin İmrohoroğlu & Douglas H. Joines, 2003. "Time-Inconsistent Preferences and Social Security," The Quarterly Journal of Economics, Oxford University Press, vol. 118(2), pages 745-784.
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  4. Tomiyama, Ken, 1985. "Two-stage optimal control problems and optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 9(3), pages 317-337, November.
  5. CREMER, Helmuth & PESTIEAU, Pierre, . "The double dividend of postponing retirement," CORE Discussion Papers RP 1696, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  8. Cremer, Helmuth & Lozachmeur, Jean-Marie & Pestieau, Pierre, 2004. "Social security, retirement age and optimal income taxation," Journal of Public Economics, Elsevier, vol. 88(11), pages 2259-2281, September.
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  11. Mastrobuoni, Giovanni, 2009. "Labor supply effects of the recent social security benefit cuts: Empirical estimates using cohort discontinuities," Journal of Public Economics, Elsevier, vol. 93(11-12), pages 1224-1233, December.
  12. 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).
  13. 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.
  14. 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.
  15. Alan L. Gustman & Thomas L. Steinmeier, 2002. "The Social Security Early Entitlement Age in a Structural Model of Retirement and Wealth," NBER Working Papers 9183, National Bureau of Economic Research, Inc.
  16. Martin Feldstein, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 303-320.
  17. Cremer, Helmuth & De Donder, Philippe & Maldonado, Darío & Pestieau, Pierre, 2006. "Voting Over Type and Generosity of a Pension System When Some Individuals are Myopic," CEPR Discussion Papers 5923, C.E.P.R. Discussion Papers.
  18. Alessandro Bucciol, 2006. "The Roles of Temptation and Social Security in Explaining Individual Behavior," "Marco Fanno" Working Papers 0032, Dipartimento di Scienze Economiche "Marco Fanno".
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  20. 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.
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