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Optimal Cap on Pension Contributions


  • Andras Simonovits

    () (Institute of Economics Research Center for Economic and Regional Studies Hungarian Academy of Sciences Mathematical Institute of Budapest University of Technology Department of Economics of CEU)


In our model, the government operates a mandatory proportional (contributive) pension system to substitute for the low life-cycle savings of the low-paid myopes. The socially optimal contribution rate is high (equalizing young- and old-age consumption for them), while an appropriate cap on pension contributions makes room for the saving of high-paid far-sighted workers. In our parameterization (with a Pareto earning distribution), the optimal cap can be determined but its aggregate impact is negligible.

Suggested Citation

  • Andras Simonovits, 2012. "Optimal Cap on Pension Contributions," IEHAS Discussion Papers 1208, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  • Handle: RePEc:has:discpr:1208

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    References listed on IDEAS

    1. Judit Karsai, 2012. "Development of the Hungarian Venture Capital and Private Equity Industry over the Past Two Decades," IEHAS Discussion Papers 1201, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    2. Ursula Schwarzhaupt & Salvador Valdés-Prieto, 2010. "Optimal Compulsion when Behavioral Biases vary and the State Errs," Documentos de Trabajo 389, Instituto de Economia. Pontificia Universidad Católica de Chile..
    3. Casamatta, Georges & Cremer, Helmuth & Pestieau, Pierre, 2000. " The Political Economy of Social Security," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 503-522, June.
    4. Zsolt Darvas, 2011. "A tale of three countries: recovery after banking crises," Policy Contributions 663, Bruegel.
    5. Simonovits, András, 2011. "When are voluntary pensions indifferent?," Economics Letters, Elsevier, vol. 111(2), pages 155-157, May.
    6. Barr, Nicholas & Diamond, Peter, 2008. "Reforming Pensions: Principles and Policy Choices," OUP Catalogue, Oxford University Press, number 9780195311303, June.
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    Cited by:

    1. Simonovits, András, 2013. "Egyszerű paternalista transzfermodellek családja
      [A family of simple paternalistic transfer models]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 402-430.
    2. András Simonovits, 2015. "Socially optimal contribution rate and cap in a proportional (DC) pension system," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 14(1), pages 45-63, December.
    3. Andras Simonovits, 2013. "A family of simple paternalistic transfer models," IEHAS Discussion Papers 1324, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.

    More about this item


    pensions; contribution rate; contribution cap; maximum for taxable earnings;

    JEL classification:

    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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