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Automatic Balancing Mechanism and Discount Rate: Towards an Optimal Transition to Balance Pay-As-You-Go Pension Scheme Without Intertemporal Dictatorship?

Author

Listed:
  • Frédéric Gannon

    (EDEHN - Equipe d'Economie Le Havre Normandie - ULH - Université Le Havre Normandie - NU - Normandie Université, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Florence Legros

    (ICN Business School, CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine)

  • Vincent Touzé

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

The paper deals with the choice of the public discount rate in the framework of dynamic control applied to a specific pension scheme's automatic balancing mechanism. We introduce a declining discount rate to address the issue of "intertemporal dictatorship". Assuming such a time-dependent discount rate permits to solve the conflict between present and political needs to procrastinate and the long-run objective of no dictatorship of the present. We use a smooth-ABM and we detail the theoretical properties of this dynamic control problem to tackle properly this issue. Finally, we apply this ABM to the US Social Security and discuss about the sensitivity of the simulated results to the speed of declining of the public discount rate.

Suggested Citation

  • Frédéric Gannon & Florence Legros & Vincent Touzé, 2021. "Automatic Balancing Mechanism and Discount Rate: Towards an Optimal Transition to Balance Pay-As-You-Go Pension Scheme Without Intertemporal Dictatorship?," Post-Print hal-03498096, HAL.
    • Handle: RePEc:hal:journl:hal-03498096
    DOI: 10.1007/978-3-030-78965-7_33
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