Can optimal unfunded public pensions co-exist with voluntary private retirement savings?

Torben M. Andersen, Joydeep Bhattacharya and Qing Liu

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

Abstract: A classic result in dynamic public economics says that for a dynamically-efficient overlapping-generations economy, there is no long-run welfare role for unfunded, pay-as-you-go (PAYG) pensions. Subsequently, the literature has shown that if agents are sufficiently myopic or present-biased, a welfare rationale arises only when agents wish to but cannot borrow (“borrowing constraint”) against future pensions – their private, voluntary retirement savings are zero. In this paper, we extend the scope of the results mentioned above. We prove that a positive optimal pension cannot coexist with a positive private retirement saving under standard preferences without the borrowing constraint. The same is true under myopia. Co-existence may obtain under the self-control and temptation preferences popularized by Gul and Pesendorfer (2004).

Date: 2024-09-05
New Economics Papers: this item is included in nep-age, nep-dge and nep-pbe
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Journal Article: Can optimal unfunded public pensions co-exist with voluntary private retirement savings? (2023)
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