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Voting Over Type and Generosity of a Pension System When Some Individuals are Myopic

Author

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  • Cremer, Helmuth
  • De Donder, Philippe
  • Maldonado, Darío
  • Pestieau, Pierre

Abstract

This paper studies the determination through majority voting of a pension scheme when society consists of far-sighted and myopic individuals. All individuals have the same basic preferences but myopics tend to adopt a short term view (instant gratification) when dealing with retirement saving. Consequently, they will find themselves with low consumption after retirement and regret their insufficient savings decisions. Henceforth, when voting they tend to commit themselves into forced saving. We consider a pension scheme that is characterized by two parameters: the payroll tax rate (that determines the size or generosity of the system) and the 'Bismarckian factor' that determines its redistributiveness. Individuals vote sequentially. We examine how the introduction of myopic agents affects the generosity and the redistributiveness of the pension system. Our main result is that a flat pension system is always chosen when all individuals are of one kind (all far-sighted or all myopic), while a less redistributive system may be chosen if society is composed of both myopic and far-sighted agents. Furthermore, while myopic individuals tend to prefer larger payroll taxes than their far-sighted counterparts, the generosity of the system does not always increase with the proportion of myopics.

Suggested Citation

  • 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.
    • Handle: RePEc:cpr:ceprdp:5923
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    References listed on IDEAS

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    1. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
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    More about this item

    Keywords

    dual-self model; myopia; social security;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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