Temptation and Social Security in a Dynastic Framework
42 Pages Posted: 25 Jun 2009 Last revised: 27 Sep 2009
Date Written: September 2, 2009
Abstract
We investigate welfare and aggregate implications of a pay-as-you-go (PAYG) social security system in a dynastic framework in which individuals have self-control problems. The presence of self-control problems induces individuals to save less because of their urge for temptation towards current consumption. Individuals’ efforts to balance between the short-term urge for temptation and the long-term commitment for consumption smoothing result in self-control costs. In this environment PAYG social security works as a self-control cost reducing device. In contrast, the presence of altruism induces individuals to save more. This in turn mitigates the adverse affects of self-control problems and PAYG social security on savings but magnifies the self-control costs. We find that in our environment the adverse welfare effects of a PAYG system are further mitigated relative to the environments that incorporate altruism and self control issues separately. Interestingly, the welfare effects vary significantly across different types of households. Richer households demand more PAYG social security as they face larger self-control costs.
Keywords: Temptation, Self-control preferences, Altruism, Social security, Dynamic general equilibrium, Overlapping generations, Welfare
JEL Classification: E21, E62, H55
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Elimination of Social Security in a Dynastic Framework
By Luisa Fuster, Ayse Imrohoroglu, ...
-
Social Security and Household Wealth Accumulation: New Microeconomic Evidence
-
Ceaseless Toil? Health and Labor Supply of the Elderly in Rural China
By Dwayne Benjamin, Loren Brandt, ...
-
The Effects of Progressive Taxation on Labor Supply When Hours and Wages are Jointly Determined
By Daniel Aaronson and Eric French
-
Patterns of Aging in Thailand and Cote D'Ivoire
By Angus Deaton and Christina H. Paxson
-
By Chung Tran and Juergen Jung