Economics Working Papers
Publication Date
4-17-2020
Number
20008
Abstract
In the real world, public pay-as-you-go pension (PAYG) schemes are popular and co-exist with private, retirement-saving schemes. This is true even in dynamically efficient economies where such pensions offer a lower return. The classic Aaron- Samuelson result argues that, in theory, this is impossible. Later work has shown that it may be possible if agents, left on their own, undersave due to myopia or time-inconsistency. In that case, if the government is paternalistic, a welfare rationale for PAYG pensions arises but only if voluntary retirement saving is fully crowded out because of a binding borrowing constraint. This paper generalizes the Aaron- Samuelson discussion to the reference-dependent utility setup of K˝oszegi and Rabin (2009) where undersaving happens naturally. No borrowing constraint is imposed. In this case, it is possible to offer a non-paternalistic, welfare rationale for return dominated, PAYG pensions to coexist with private retirement saving.
JEL Classification
E6, H55
Version History
Original Release Date: April 17, 2020
Departments
Department of Economics, Iowa State University
File Format
application/pdf
Length
49 pages
Recommended Citation
Andersen, Torben M.; Bhattacharya, Joydeep; and Liu, Qing, "Reference-dependent preferences, time inconsistency, and unfunded pensions" (2020). Economics Working Papers: Department of Economics, Iowa State University. 20008.
https://lib.dr.iastate.edu/econ_workingpapers/103
