Reference-Dependent Preferences, Time Inconsistency, and Unfunded Pensions

Arbeitspapier

In the real world, public pay-as-you-go pension (PAYG) schemes are popular and co-exist with private, retirement-saving schemes. This is true even in dynamically efficient economies where such pensions offer a lower return. The classic Aaron-Samuelson result argues that, in theory, this is impossible. Later work has shown that it may be possible if agents, left on their own, undersave due to myopia or time-inconsistency. In that case, if the government is paternalistic, a welfare rationale for PAYG pensions arises but only if voluntary retirement saving is fully crowded out because of a binding borrowing constraint. This paper generalizes the Aaron-Samuelson discussion to the reference-dependent utility setup of Kőszegi and Rabin (2009) where undersaving happens naturally. No borrowing constraint is imposed. In this case, it is possible to offer a non-paternalistic, welfare rationale for return-dominated, PAYG pensions to coexist with private retirement saving.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 8260

Classification and Topics

• Classification: Wirtschaft ; Social Security and Public Pensions ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
• Subject: reference-dependence ; crowding-out ; pensions ; dynamic efficiency

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Andersen, Torben M. ; Bhattacharya, Joydeep ; Liu, Qing
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/217011
• Last update: 10.03.2025, 11:42 AM CET