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Short horizons, time inconsistency, and optimal social security

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  • T. Findley
  • Frank Caliendo

Abstract

We study the optimal provision of social security in a dynamically efficient economy using a continuous-time overlapping-generations model in which consumers have short planning horizons. The short-horizon mechanism leads to dynamic optimization that is time-inconsistent over the life cycle. Our calibrated general-equilibrium results are generally supportive of social security for a wide array of social welfare functions. Thus, the basic life-cycle model can be augmented with only this slight twist in order to rationalize a social security program with the current U.S. tax rate. Copyright Springer Science+Business Media, LLC 2009

Suggested Citation

  • T. Findley & Frank Caliendo, 2009. "Short horizons, time inconsistency, and optimal social security," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(4), pages 487-513, August.
    • Handle: RePEc:kap:itaxpf:v:16:y:2009:i:4:p:487-513
    DOI: 10.1007/s10797-009-9115-2
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    More about this item

    Keywords

    Short planning horizons; Time-inconsistent preferences; Social security; Optimal taxation; Dynamic optimization; Life-cycle consumption; Dynamic welfare analysis; H55; D91; C61;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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