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Social Security Reform and Temptation

  • Cagri Seda Kumru
  • Athanasios C. Thanopoulos

This paper analyzes a fully funded social security system under the assumption that agents face temptation issues. Agents are required to save through individually managed Personal Security Accounts without, and with mandatory annuitization. When the analysis is restricted to CRRA preferences our results are congruent with the literature indicating that the complete elimination of social security is the reform scenario that maximizes welfare improvement. However, when self control preferences are introduced, and as the intensity of self control becomes progressively more severe the "social security elimination" scenario loses ground very rapidly. In fact, in the case of very severe temptation the elimination of social security becomes the least desirable alternative. Under the light of the above findings, any reform proposal regarding the social security system should consider departures from standard preferences to preference specifications suitable for dealing with preference reversals.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-09/cesifo1_wp2778.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2778.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2778
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  1. Hugett, M. & Ventura, G., 1997. "On the Distributional Effects of Social Security Reform," UWO Department of Economics Working Papers 9710, University of Western Ontario, Department of Economics.
  2. Luisa Fuster & Ayse Imrohoroglu & Selahattin Imrohoroglu, 2005. "Personal Security Accounts and Mandatory Annuitization in a Dynastic Framework," CESifo Working Paper Series 1405, CESifo Group Munich.
  3. W. Pesendorfer & F. Gul, 1999. "Self-Control and the Theory of Consumption," Princeton Economic Theory Papers 99f2, Economics Department, Princeton University.
  4. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2003. "Annuities and Individual Welfare," NBER Working Papers 9714, National Bureau of Economic Research, Inc.
  5. Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 1999. "The risk-sharing implications of alternative social security arrangements," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 213-259, June.
  6. Hans Fehr & Fabian Kindermann, 2009. "Pension funding and individual accounts in economies with life-cyclers and myopes," Working Papers 2009/23, Institut d'Economia de Barcelona (IEB).
  7. Hans Fehr & Christian Habermann & Fabian Kindermann, 2006. "Social Security with Rational and Hyperbolic Consumers," Working Papers 010, Bavarian Graduate Program in Economics (BGPE).
  8. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, vol. 6(1), pages 83-114, June.
  9. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
  10. Juan Rojas & Carlos Urrutia, 2004. "Social Security Reform with Uninsurable Income Risk and Endogenous Borrowing Constraints," Macroeconomics 0410010, EconWPA.
  11. Peter A. Diamond & Peter R. Orszag, 2005. "Saving Social Security," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 11-32, Spring.
  12. DeJong, David N. & Ripoll, Marla, 2007. "Do self-control preferences help explain the puzzling behavior of asset prices?," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1035-1050, May.
  13. 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.
  14. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  15. Luisa Fuster & Ayse Imrohoroglu & Selahattin Imrohoroglu, 2003. "A welfare analysis of social security in a dynastic framework," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1247-1274, November.
  16. 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.
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