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Social Security Reform with Self-Control Preferences

  • Cagri S. Kumru

    ()

    (School of Economics, University of New South Wales)

  • Athanasios C. Thanopoulos

    ()

    (Department of Economics, University of Pittsburgh)

This paper analyzes a fully funded social security system under the assumption that agents face temptation issues. Agents are required to save through individually managed Personal Security Accounts without, and with mandatory annuitization. When the analysis is restricted to CRRA preferences our results are congruent with the literature in indicating that the complete elimination of social security is among the reform scenarios that maximize welfare. However, when self control preferences are introduced, and as the intensity of self control becomes progressively more severe the "social security elimination" scenario loses ground very rapidly. In fact, in the case of relatively severe temptation the elimination of social security becomes the least desirable alternative. Under the light of the above findings, any reform proposal regarding the social security system should consider departures from standard preferences to preference specifications suitable for dealing with preference reversals.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2010-11.pdf
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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2010-11.

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Length: 28 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:swe:wpaper:2010-11
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