Reference-dependent preferences, time inconsistency, and unfunded pensions

Torben M. Andersen, Joydeep Bhattacharya and Qing Liu

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: In the real world, public pay-as-you-go pension (PAYG) schemes are popular and co-exist with private, retirement-saving schemes. This is true even in dynamically efficient economies where such pensions offer a lower return. The classic Aaron- Samuelson result argues that, in theory, this is impossible. Later work has shown that it may be possible if agents, left on their own, undersave due to myopia or time-inconsistency. In that case, if the government is paternalistic, a welfare rationale for PAYG pensions arises but only if voluntary retirement saving is fully crowded out because of a binding borrowing constraint. This paper generalizes the Aaron- Samuelson discussion to the reference-dependent utility setup of K˝oszegi and Rabin (2009) where undersaving happens naturally. No borrowing constraint is imposed. In this case, it is possible to offer a non-paternalistic, welfare rationale for return dominated, PAYG pensions to coexist with private retirement saving.

Date: 2020-04-17
New Economics Papers: this item is included in nep-age and nep-upt
References: Add references at CitEc
Citations:

Downloads: (external link)
https://dr.lib.iastate.edu/server/api/core/bitstre ... cbeb8334573a/content
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
Working Paper: Reference-Dependent Preferences, Time Inconsistency, and Unfunded Pensions (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:isu:genstf:202004170700001102

Access Statistics for this paper

More papers in ISU General Staff Papers from Iowa State University, Department of Economics Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070. Contact information at EDIRC.
Bibliographic data for series maintained by Curtis Balmer ().