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The Hayek Pension: An efficient minimum pension to complement the welfare state

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  • Jakob von Weizsäcker

Abstract

A means tested minimum income for old age creates an incentive for some not to save for old age and instead to free ride. Recent literature is undecided to what extent this inefficient savings distortion should be addressed by a compulsory pension system because resulting labour-leisure distortions could be even worse. In a simple optimal taxation framework we show that it is Pareto improving to fully eliminate the savings distortion by means of a compulsory pension termed “Hayek pension” that decreases with after-tax lifetime earnings, with zero pension benefits for middle and high incomes. A combination of the Hayek pension and the contribution dependent Bismarck pension is found to be superior to the tax financed flat benefit Beverage pension.

Suggested Citation

  • Jakob von Weizsäcker, 2003. "The Hayek Pension: An efficient minimum pension to complement the welfare state," CESifo Working Paper Series 1064, CESifo.
    • Handle: RePEc:ces:ceswps:_1064
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    References listed on IDEAS

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    6. Robert Fenge & Jakob Weizsäcker, 2001. "Compulsory Savings: Efficiency and Redistribution On the Interaction of Means Tested Basic Income and Public Pensions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 637-652, August.
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    Cited by:

    1. Pierre Pestieau & Uri Possen, 2008. "Prodigality And Myopia—Two Rationales For Social Security," Manchester School, University of Manchester, vol. 76(6), pages 629-652, December.
    2. Erin Cottle Hunt & Frank N. Caliendo, 2022. "Social security and risk sharing: A survey of four decades of economic analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 36(5), pages 1591-1609, December.

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