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Can optimal unfunded public pensions co-exist with voluntary private retirement savings?

Author

Listed:
  • Torben M. Andersen

    (Aarhus University)

  • Joydeep Bhattacharya

    (Iowa State University)

  • Qing Liu

    (Zhongnan University of Economics and Law)

Abstract

A classic result in dynamic public economics says that for a dynamically efficient overlapping-generations economy, there is no long-run welfare role for unfunded, pay-as-you-go (PAYG) pensions. Subsequently, the literature has shown that if agents are sufficiently myopic or present-biased, a welfare rationale arises only when agents wish to but cannot borrow (“borrowing constraint”) against future pensions—their private, voluntary retirement savings are zero. In this paper, we extend the scope of the results mentioned above. We prove that a positive optimal pension cannot co-exist with a positive private retirement saving under standard preferences without the borrowing constraint. The same is true under myopia. Co-existence may obtain under the self-control and temptation preferences popularized by Gul and Pesendorfer (2004).

Suggested Citation

  • Torben M. Andersen & Joydeep Bhattacharya & Qing Liu, 2023. "Can optimal unfunded public pensions co-exist with voluntary private retirement savings?," Indian Economic Review, Springer, vol. 58(1), pages 237-251, July.
    • Handle: RePEc:spr:inecre:v:58:y:2023:i:1:d:10.1007_s41775-023-00174-z
    DOI: 10.1007/s41775-023-00174-z
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    More about this item

    Keywords

    Temptation; Self-control; Myopia; Crowding-out; Pensions; Dynamic efficiency;
    All these keywords.

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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