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Optimal redistributive pensions and the cost of self-control

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Abstract

We examine how the introduction of self-control preferences influences the tradeoff between two fundamental components of a public pension system: the contribution rate and its degree of redistribution. The pension regime affects individuals’ welfare by altering how yielding to temptation (i.e., not saving, or saving less) is attractive. We show that proportional taxation increases the cost of self-control, and that this adverse effect is more acute when public pensions become more redistributive.

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Notes

  1. Krussel et al. (2010) studied a Ramsey tax problem with linear taxes in a single-agent model, and advocated late consumption and savings subsidies.

  2. See Frederick et al. (2002) for a historical survey of time-discounting.

  3. For simplicity, here we assume that individuals face no binding liquidity constraints and the absence of risks.

  4. Two of the standard assumptions of the standard decision-utility model are therefore generated by the geometric discount function: the fixed lifetime preferences condition and the no-mistake property (Bernheim and Rangel 2007).

  5. In particular, credit card and debt puzzles raised the issue that many households simultaneously hold high-interest credit card debts, while otherwise saving through devices that yield significantly lower returns (Laibson et al. 2003; Haliassos and Reiter 2005).

  6. In Ameriks et al. (2007), subjects were asked to allocate a prize over time. They were also questioned about their ideal plan, and about whether they expected to deviate from it. The authors used these data to construct an index called the “ideal-expected gap”, which was found to be correlated with present-biased behavior. So individuals act in full knowledge that they do not follow their ideal plan.

  7. Note that the pension plan’s budget is always balanced by definition, as is typical in linear-progressive tax models.

  8. It satisfies \(\varphi (0) = 0, \ \varphi '(0) = 0, \ \varphi '(L_{ijt})>0 ~\forall L_{ijt}>0\) and \(\varphi ''(L_{ijt})>0~\forall L_{ijt}>0\).

  9. The only requirement is that the problem must be globally concave, or that \(u''(c_{ijt}) + \lambda _{j} v''(c_{ijt}) < 0, \ \forall ij\).

  10. That \(\partial E(Y)/\partial \alpha > 0\) can be observed from the first-order conditions with respect to \(L_{ijt},\) although the comparative statics is highly intractable in our three-period model.

  11. This contrasts with paternalistic objectives found in models of quasi-hyperbolic discounting (as previously discussed) in which the government must choose how to interpret the preference reversal of individuals.

  12. Note that \(\alpha =1\) means that the sole role of the pension system is to force individuals to save. It can only happen when all individuals are identical in all respects, in which case pensions are perfect substitutes for savings. It does not happen here, since the distribution of wages is a motive for redistribution.

  13. In our simulations, all agents have positive savings when \(\pi =0\). As a consequence, the first-order conditions for labor depend solely on \((1-\alpha )\tau \) altogether. There is thus a degree of freedom in choosing the pair (\(\alpha ^{*}, \tau ^{*}\)). We report in this last line the value \((0, \tau ^{*}_{0})\) that satisfy the first-order condition. Any other pair satisfying \((1-\alpha )\tau = \tau ^{*}_{0}\) would work.

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Acknowledgments

We thank Charles Bellemarre, Robin Boadway, Helmuch Cremer, Sean Horan, Sumon Majumdar, Pierre-Carl Michaud, Marie-Louise Vierø, Tim Worall, Pierre-Yves Yanni, seminar participants at Université Laval and two anonymous referees for their suggestions and comments.

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Authors and Affiliations

  1. Institute for New Economic Thinking, 300 Park Ave. South, 5th Floor, New York, NY , 10010, USA

    Pier-André Bouchard St-Amant

  2. Département des sciences économiques, Université du Québec à Montréal and CESIfo., 315 Ste-Catherine Est., Montréal, QC , H2X 3X2, Canada

    Jean-Denis Garon

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Bouchard St-Amant, PA., Garon, JD. Optimal redistributive pensions and the cost of self-control. Int Tax Public Finance 22, 723–740 (2015). https://doi.org/10.1007/s10797-014-9331-2

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