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To what Extent are Public Pensions Pareto-improving? On the Interaction of Means Tested Basic Income and Public Pensions

  • Robert Fenge
  • Jakob von Weizsäcker

If there is a means tested basic income for old age, households will tend to reduce precautionary savings to an inefficiently low level. This might serve as a justification for a public pension system. In a representative agent framework, indeed, the introduction of a compulsory pension s ystem is shown to be Pareto improving. This analysis is extended to two income types where compulsory savings are found to be Pareto improving only up to a point. Increases in contribution rates beyond that point simply result in increasingly regressive (implicit) taxation, potentially eliminating all redistribution via the means tested basic income. Using these results in a pay-as-you-go framework, we show that an unfunded pensions system (with intragenerational fairness) plays a role similar to compulsor y savings in preventing the savings moral hazard and could have the same adverse effects on redistribution if it is too large. If the population is aging, however, an unfunded system with a constant contribution rate is found to become less effective at pr eventing the savings moral hazard. In this case, the introduction of a funded system of the right size is needed to restore Pareto efficiency.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 197.

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Date of creation: 1999
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Handle: RePEc:ces:ceswps:_197
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  1. Homburg, Stefan & Richter, Wolfram, 1990. "Eine effizienzorientierte Reform der GRV," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 183-191..
  2. Martin Feldstein, 1982. "The Optimal Level of Social Security Benefits," NBER Working Papers 0970, National Bureau of Economic Research, Inc.
  3. Homburg, Stefan, 2014. "The Efficiency of Unfunded Pension Schemes," Hannover Economic Papers (HEP) dp-523, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  4. CREMER, Helmuth & PESTIEAU, Pierre, . "Social insurance, majority voting and labor mobility," CORE Discussion Papers RP -1328, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Laitner, John, 1988. "Bequests, Gifts, and Social Security," Review of Economic Studies, Wiley Blackwell, vol. 55(2), pages 275-99, April.
  6. Lindbeck, Assar & Weibull, Jorgen W, 1988. "Altruism and Time Consistency: The Economics of Fait Accompli," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1165-82, December.
  7. Laurence J. Kotlikoff & Kent A. Smetters & Jan Walliser, 1998. "Opting Out of Social Security and Adverse Selection," NBER Working Papers 6430, National Bureau of Economic Research, Inc.
  8. Browning, Edgar K, 1975. "Why the Social Insurance Budget Is Too Large in a Democracy," Economic Inquiry, Western Economic Association International, vol. 13(3), pages 373-88, September.
  9. Martin Feldstein, 1995. "Would Privatizing Social Security Raise Economic Welfare?," NBER Working Papers 5281, National Bureau of Economic Research, Inc.
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