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

Torben M. Andersen (), Joydeep Bhattacharya and Qing Liu ()
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Torben M. Andersen: Aarhus University
Qing Liu: Zhongnan University of Economics and Law

Indian Economic Review, 2023, vol. 58, issue 1, No 15, 237-251

Abstract: 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 co-exist 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).

Keywords: Temptation; Self-control; Myopia; Crowding-out; Pensions; Dynamic efficiency (search for similar items in EconPapers)
JEL-codes: D15 D9 E6 H55 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s41775-023-00174-z

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