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On Pessimism and Optimism by Forward Looking Agents and the Need for Social Security

Author

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  • Batabyal, Amitrajeet
  • Nijkamp, Peter

Abstract

We study whether pessimism and optimism about the future by forward looking agents provides a rationale for social security. We first distinguish between an agent’s true and pessimistic preferences and then analyze whether this agent’s level of saving depends on the pessimism parameter ( π ) and how welfare measured by the agent’s true preferences depends on π . Next, we examine whether it is possible for pessimism to increase the agent’s true utility and then show that this kind of pessimism does not provide a rationale for social security. Moving on to optimism, we study the need for a pay-as-you-go (PAYG) social security system when the agent is optimistic about the generosity of the PAYG system. This optimism is modeled with a parameter ( ω ). In this setting, we first study the impact that an increase in ω has on the agent’s saving and then examine whether this agent’s welfare increases or decreases in ω . Finally, we show that this kind of optimism does not justify the presence of the PAYG social security system.

Suggested Citation

  • Batabyal, Amitrajeet & Nijkamp, Peter, 2016. "On Pessimism and Optimism by Forward Looking Agents and the Need for Social Security," MPRA Paper 75965, University Library of Munich, Germany, revised 03 Jan 2017.
  • Handle: RePEc:pra:mprapa:75965
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    File URL: https://mpra.ub.uni-muenchen.de/75965/1/MPRA_paper_75965.pdf
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    References listed on IDEAS

    as
    1. John Sabelhaus & Julie Topoleski, 2007. "Uncertain policy for an uncertain world: The case of social security," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 26(3), pages 507-525.
    2. Luc Behaghel & David M. Blau, 2012. "Framing Social Security Reform: Behavioral Responses to Changes in the Full Retirement Age," American Economic Journal: Economic Policy, American Economic Association, vol. 4(4), pages 41-67, November.
    3. Torben Andersen & Joydeep Bhattacharya, 2011. "On myopia as rationale for social security," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 47(1), pages 135-158, May.
    4. Shlomo Benartzi & Richard Thaler, 2007. "Heuristics and Biases in Retirement Savings Behavior," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 81-104, Summer.
    5. Martin Feldstein, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 303-320.
    6. Lauren E. Willis, 2011. "The Financial Education Fallacy," American Economic Review, American Economic Association, vol. 101(3), pages 429-434, May.
    7. Roman Raab, 2011. "Financial incentives in the Austrian PAYG-pension system: micro-estimation," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 38(2), pages 231-257, May.
    8. van Sonsbeek, Jan-Maarten, 2010. "Micro simulations on the effects of ageing-related policy measures," Economic Modelling, Elsevier, vol. 27(5), pages 968-979, September.
    9. Reyers, Michelle & van Schalkwyk, Cornelis Hendrik & Gouws, Daniël Gerhardus, 2015. "Rational and behavioural predictors of pre-retirement cash-outs," Journal of Economic Psychology, Elsevier, vol. 47(C), pages 23-33.
    10. Henrik Cronqvist & Richard H. Thaler, 2004. "Design Choices in Privatized Social-Security Systems: Learning from the Swedish Experience," American Economic Review, American Economic Association, vol. 94(2), pages 424-428, May.
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    More about this item

    Keywords

    Optimism; Overlapping Generations; Pessimism; Saving; Social Security;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy

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