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Designing a linear pension scheme with forced savings and wage heterogeneity

  • CREMER, Helmuth
  • DE DONDER, Philippe
  • MALDONADO, Dario
  • PESTIEAU, Pierre

This paper studies the optimal linear pension scheme when society consists of rational and myopic individuals. Myopic individuals have, ex ante, a strong preference for the present even though, ex post, they would regret not to have saved enough. While rational and myopic persons share the same ex post intertemporal preferences, only the rational agents make their savings decisions according to these preferences. Individuals are also distinguished by their productivity. The social ob jective is “paternalisticâ€: the utilitarian welfare function depends on ex post utilities. We examine how the presence of myopic individuals affects both the size of the pension system and the degree of redistribution it operates. The relationship between proportion of myopic individuals and characteristics of the pension system turns out to be much more complex than one would have conjectured. Neither the impact on the level of pensions nor the effect on their redistributive degree are unambiguous. Nevertheless, we show that under some plausible assumptions adding myopic individuals increases the level of pension beneï¬ts and leads to a shift from a flat or even targeted scheme to a partially contributory one. However, we also provide an example where the degree of redistribution is not a monotonic function of the proportion of myopic individuals.

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File URL: http://dx.doi.org/10.1007/s10797-007-9031-2
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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number 2040.

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Handle: RePEc:cor:louvrp:2040
Note: In : International Tax Public Finance, 15, 547-562, 2008
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  1. 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.
  2. Feldstein, Martin S, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 303-20, May.
  3. Ted O' Donoghue & Matthew Rabin, 2001. "Choice and Procrastination," Microeconomics 0012002, EconWPA.
  4. Helmuth Cremer & Philippe De Donder & Darío Maldonado & Pierre Pestieau, 2008. "Forced Saving, Redistribution and Nonlinear Social Security Schemes," CESifo Working Paper Series 2325, CESifo Group Munich.
  5. Summers, Lawrence H, 1989. "Some Simple Economics of Mandated Benefits," American Economic Review, American Economic Association, vol. 79(2), pages 177-83, May.
  6. 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.
  7. Cremer, Helmuth & De Donder, Philippe & Maldonado, Dario & Pestieau, Pierre, 2007. "Voting over type and generosity of a pension system when some individuals are myopic," Journal of Public Economics, Elsevier, vol. 91(10), pages 2041-2061, November.
  8. PESTIEAU , Pierre & POSSEN , Uri , 2008. "Prodigality and myopia. Two rationales for social security," CORE Discussion Papers 2008011, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
  10. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 3, number 3.
  11. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 4, number 4.
  12. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
  13. Homburg, Stefan, 2000. "Compulsory savings in the welfare state," Journal of Public Economics, Elsevier, vol. 77(2), pages 233-239, August.
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