Designing a Linear Pension Scheme with Forced Savings and Wage Heterogeneity

CORE Discussion Paper No. 2006/47

17 Pages Posted: 22 Aug 2006

See all articles by Helmuth Cremer

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Philippe De Donder

University of Toulouse 1 - Toulouse School of Economics (TSE)

Dario Maldonado

Universidad del Rosario - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Pierre Pestieau

University of Liège - Research Center on Public and Population Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

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Date Written: March 2006

Abstract

This paper studies the optimal linear pension scheme when society consists of rational and myopic individuals. Myopic individuals have, ex ante, a strong preference for the present even though, ex post, they would regret not to have saved enough. While rational and myopic persons share the same ex post intertemporal preferences, only the rational agents make their savings decisions according to these preferences. Individuals are also distinguished by their productivity. The social objective is paternalistic: the utilitarian welfare function depends on ex post utilities. We examine how the presence of myopic individuals affects both the size of the pension system and the degree of redistribution it operates. The relationship between proportion of myopic individuals and characteristics of the pension system turns out to be much more complex than one would have conjectured. Neither the impact on the level of pensions nor the effect on their redistributive degree are unambiguous. Nevertheless, we show that under some plausible assumptions adding myopic individuals increases the level of pension benefits and leads to a shift from a flat or even targeted scheme to a partially contributory one. However, we also provide an example where the degree of redistribution is not a monotonic function of the proportion of myopic individuals.

Keywords: social security, myopia, dual-self model

JEL Classification: H55, D91

Suggested Citation

Cremer, Helmuth and De Donder, Philippe and Maldonado, Dario and Pestieau, Pierre, Designing a Linear Pension Scheme with Forced Savings and Wage Heterogeneity (March 2006). CORE Discussion Paper No. 2006/47, Available at SSRN: https://ssrn.com/abstract=925655 or http://dx.doi.org/10.2139/ssrn.925655

Helmuth Cremer (Contact Author)

University of Toulouse (GREMAQ & IDEI) ( email )

Toulouse, 31000
France
+33 1 6112 8606 (Phone)
+33 1 6112 8637 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Philippe De Donder

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Dario Maldonado

Universidad del Rosario - Department of Economics ( email )

Casa Pedro Fermín
Calle 14 # 4-69
Bogota
Colombia

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Pierre Pestieau

University of Liège - Research Center on Public and Population Economics ( email )

Boulevard du Rectorat, 7, Batiment 31
Sart-Tilman
B-4000 Liege, 4000
Belgium
+32 4 366 3108 (Phone)
+32 4 366 3106 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Vopie Roman Pays
Louvain la Neuve
Belgium

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