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Optimal Actuarial Fairness in Pension Systems - a Note

  • Hassler, John


    (Institute for International Economic Studies, Stockholm University)

  • Lindbeck, Assar


    (Institute for International Economic Studies, Stockholm University)

A rationale for a compulsory pension system is that the government wants to correct supposedly myopic behavior by the individuals. Given the existence of such a system, we calculate the optimal relation between marginal contributions and benefits, i.e., the optimal degree of marginal actuarial fairness, as seen from the point of view of the individuals or of the government. The following is shown to hold under general assumptions of individual utility: The optimal degree of marginal actuarial fairness increases in the rate of return in the social security system and decreases in the government’s rate of time preference. If the government’s rate of time preference is lower than the individual’s, the government gains more than the individuals by making the system more actuarially fair. It is also shown that labor supply always increases when the link between marginal contributions and benefits is strengthened.

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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 609.

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Length: 14 pages
Date of creation: 03 Nov 1997
Date of revision:
Handle: RePEc:hhs:iiessp:0609
Contact details of provider: Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Phone: +46-8-162000
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  1. Ekman, E., 1996. "Consumption and Savings Over the Life Cycle," Papers 1996-02, Uppsala - Working Paper Series.
  2. Stephen Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
  3. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
  4. Andrew B. Abel, 1985. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," NBER Working Papers 1664, National Bureau of Economic Research, Inc.
  5. Feldstein, Martin, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," American Economic Review, American Economic Association, vol. 86(2), pages 1-14, May.
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