Optimal social security tax with myopic agents

Hsun Chu and Chu-chuan Cheng

Economic Modelling, 2019, vol. 80, issue C, 320-327

Abstract: Myopic agents lack the foresight to save for their own old age. It is generally believed that correcting myopia is a rationale for a pay-as-you-go (PAYG) pension system. This view has been supported by existing literature showing that the optimal PAYG social security tax should increase when people are more myopic. In this paper we obtain new results opposed to the traditional view. By establishing a very standard general equilibrium OLG model with myopic agents and endogenized marginal product of capital, we show that the optimal social security tax should be lower when people are more myopic. Our numerical analysis also shows that the welfare cost of the social security tax increases with people's degree of myopia. These results suggest that correcting myopia is not a clear rationale for the PAYG social security.

Keywords: PAYG pensions; Myopic behaviors; Social security tax (search for similar items in EconPapers)
JEL-codes: H30 H55 J26 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:80:y:2019:i:c:p:320-327

DOI: 10.1016/j.econmod.2018.11.017

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