Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/217011
Authors: 
Andersen, Torben M.
Bhattacharya, Joydeep
Liu, Qing
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper 8260
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 Kőszegi 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.
Subjects: 
reference-dependence
crowding-out
pensions
dynamic efficiency
JEL: 
H55
E60
Document Type: 
Working Paper

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