How did Feldstein (1985) undervalue the optimal level of social security benefits?

Andras Simonovits ()
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Andras Simonovits: Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences also Mathematical Institute of Budapest University of Technology

No 1722, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: In his seminal model (Feldstein, 1985), the government operates a social security system to counter the representative worker's myopia. (i) For a complete myope, he determined a sizable optimal tax rate (and the corresponding benefit level). (ii) For a partially shortsighted worker, he determined another optimum, which was much lower, possibly zero. Departing from Feldstein, I take into account that neither a paternalistic government nor a cautious bank tolerates long-term negative saving, and then even in (ii), the government may choose the first rather than the second optimum. Having revised it, Feldstein's model regains its place in the textbooks.

Keywords: social security; myopia; paternalism; social welfare (search for similar items in EconPapers)
JEL-codes: D10 H55 J13 J14 J18 J26 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2017-09
New Economics Papers: this item is included in nep-age
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