Reference-dependent preferences, time inconsistency, and pay-as-you-go pensions
Date
Authors
Major Professor
Advisor
Committee Member
Journal Title
Journal ISSN
Volume Title
Publisher
Authors
Research Projects
Organizational Units
Journal Issue
Is Version Of
Versions
Series
Department
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.
Comments
This article is published as Andersen, Torben M., Joydeep Bhattacharya, and Qing Liu. "Reference‐dependent preferences, time inconsistency, and pay‐as‐you‐go pensions." Economic Inquiry 59, no. 3 (2021): 1008-1030. doi:10.1111/ecin.12972.