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Optimal taxes and pensions in a society with myopic agents

  • Kerstin Roeder

    ()

    (Universität Augsburg)

This paper derives the optimal pension and tax parameters in a society where individuals differ in two characteristics: rationality and productivity. Rational agents, if not liquidity constrained, smooth consumption over their life-cycle. Myopic agents, by contrast, have ex ante a strong preference for the present and undertake no savings, even though, ex post they regret their decision. Given a paternalistic social objective aiming at maximizing the sum over ex post utilities, this paper shows how both transfer systems interact in their degree of redistribution and generosity. Moreover, it reveals how the optimal policy parameters change if capital markets are imperfect, implying that agents cannot borrow against their retirement benefits. Analytical and numerical results show that in some cases only one transfer system prevails.

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File URL: http://ieb.ub.edu/aplicacio/fitxers/2009/10/Doc2009-28.pdf
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Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2009/28.

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Length: 34 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ieb:wpaper:2009/10/doc2009-28
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  1. Schwarz, Mordechai E. & Sheshinski, Eytan, 2007. "Quasi-hyperbolic discounting and social security systems," European Economic Review, Elsevier, vol. 51(5), pages 1247-1262, July.
  2. Daniel S. Hamermesh, 1982. "Consumption During Retirement: The Missing Link in the Life Cycle," NBER Working Papers 0930, National Bureau of Economic Research, Inc.
  3. Cigno, Alessandro, 2008. "Is there a social security tax wedge," Labour Economics, Elsevier, vol. 15(1), pages 68-77, February.
  4. Mathias Kifmann, 2004. "Age-dependent taxation and the optimal retirement benefit formula," Working Papers of the Research Group Heterogenous Labor 04-20, Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim.
  5. CREMER, Helmuth & De DONDER, Philippe & MALDONADO, Dario & PESTIEAU, Pierre, . "Forced saving, redistribution, and nonlinear social security schemes," CORE Discussion Papers RP -2147, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  7. Butler, Monika, 2002. " Tax-Benefit Linkages in Pension Systems: A Note," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(3), pages 405-15.
  8. Louis Kaplow, 2006. "Myopia and the Effects of Social Security and Capital Taxation on Labor Supply," NBER Working Papers 12452, National Bureau of Economic Research, Inc.
  9. Martin Feldstein, 1982. "The Optimal Level of Social Security Benefits," NBER Working Papers 0970, National Bureau of Economic Research, Inc.
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