Reference-dependent preferences, time inconsistency, and pay-as-you-go pensions

Torben M. Andersen, Joydeep Bhattacharya and Qing Liu

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

Abstract: The classic Aaron–Samuelson result argues that pay-as-you-go (PAYG) pension schemes cannot coexist with higher-return, private, retirement-saving schemes. The ensuing literature shows if agents voluntarily undersave for retirement due to myopia or time-inconsistency, then a paternalistic, rationale for PAYG pensions arises only if voluntary retirement saving is fully crowded out because of a binding borrowing constraint. This paper generalizes the discussion to the reference-dependent utility setup of Kőszegi and Rabin (2009) where undersaving happens naturally. No borrowing constraint is imposed. We show it is possible to offer a non-paternalistic, welfare rationale for return-dominated, PAYG pensions to coexist with private, retirement saving.

Date: 2021-07-01
New Economics Papers: this item is included in nep-age, nep-isf and nep-upt
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Journal Article: Reference‐dependent preferences, time inconsistency, and pay‐as‐you‐go pensions (2021)
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