Portuguese Economic Journal

, Volume 14, Issue 1–3, pp 45–63 | Cite as

Socially optimal contribution rate and cap in a proportional (DC) pension system

Original Article

Abstract

In our model, the government operates a mandatory proportional (DC) pension system to substitute for the low life-cycle savings of the lower-paid myopic workers, while maintaining the incentives of the higher-paid far-sighted ones in contributing to the system. The introduction of an appropriate cap on pension contribution (or its base)—excluding the earnings above the cap from the contribution base—raises the optimal contribution rate, helping more the lower-paid myopic workers and reserving enough room for the saving of higher-paid far-sighted ones. The social welfare is almost independent of the cap in a relatively wide interval but the maximal welfare is higher than the capless welfare by 0.3–4.5 %.

Keywords

Proportional (DC) pensions Contribution rate Contribution cap Maximum for taxable earnings 

JEL Classification

H53 H24 

References

  1. Barr N, Diamond P (2008) Reforming pensions: principles and policy choices. Oxford University Press, OxfordCrossRefGoogle Scholar
  2. Becker G, Mulligan CB (1997) On the Optimal Determination of Time Preferences. Q J Econ 112:729–758CrossRefGoogle Scholar
  3. Borck R (2007) On the choice of public pensions when income and life expectancy are correlated. J. Public Economic Theory 9:711–725CrossRefGoogle Scholar
  4. Cremer H, De Donder Ph, Maldonaldo D, Pestieau P (2008) Designing a linear pension scheme with forced savings and wage heterogeneity. Int Tax Public Finance 15:547–562CrossRefGoogle Scholar
  5. Cremer H, Pestieau P (2011) Myopia, redistribution and pensions. Eur Econ Rev 55:165–175CrossRefGoogle Scholar
  6. Diamond PA, Orszag P (2004) Saving social security: a balanced approach, Washington. Brookings Institution, D.C.Google Scholar
  7. Diamond PA, Saez E (2011) The case for a progressive tax: from basic research to policy prescriptions. J Econ Perspect 23(4):165–190CrossRefGoogle Scholar
  8. Disney R (2004) Are contributions to public pension programmes a tax on employment?. Econ Policy 39:267–311Google Scholar
  9. Docquire F (2002) On the optimality of mandatory pensions in an economy with life-cyclers and Myopes. J Econ Behav Organ 47:121–140CrossRefGoogle Scholar
  10. Fehr H, Kallweit M, Kindermann F (2013) Should pensions be progressive?. Eur Econ Rev 63:94–116CrossRefGoogle Scholar
  11. Feldstein MS (1985) The optimal level of social benefits. Q J Econ 100:302–320CrossRefGoogle Scholar
  12. Feldstein MS (1987) Should social security means be tested?. Journal of Political Economy 95:468–484CrossRefGoogle Scholar
  13. Feldstein M (2005) Structural reform of social security. J Econ Perspect 19(1):33–55CrossRefGoogle Scholar
  14. Findley TS, Caliendo FN (2009) Short horizons, time inconsistency, and the optimal social security. Int J Public Finance 16:487–513CrossRefGoogle Scholar
  15. Laibson D (1997) Golden eggs and hyperbolic discounting. Q J Econ 112:443–477CrossRefGoogle Scholar
  16. Lovell M C (2009) Social securitys five OASI inflation indexing problems, Economics: The Open Access, Open Assessed E-Journal, 140Google Scholar
  17. Pestieau P, Ponthiere G (2014) Policy implications for changing longevity. CESifo Econ Stud 60:178–212CrossRefGoogle Scholar
  18. Samuelson PA (1975) Optimum social security in a life-cycle growth model. Int Econ Rev 16:539–544CrossRefGoogle Scholar
  19. Simonovits A (2009) Underreported earning and age-specific income redistribution in post-socialist economies, IE-HAS Discussion Papers 27Google Scholar
  20. Simonovits A (2011) When are voluntary pensions indifferent?. Econ Lett 111:153–155CrossRefGoogle Scholar
  21. Simonovits A (2012) Optimal cap on pension contributions, IE–CERS–HAS Discussion Papers 8. BudapestGoogle Scholar
  22. Tenhunen S, Tuomala M (2010) On optimal lifetime redistribution policy. J Public Econ Theory 12:171–198CrossRefGoogle Scholar
  23. Valdés-Prieto S, Schwarzhupt U (2011) Optimal compulsion when behavioural biases vary and the state errs, CESifo Working Paper 3316Google Scholar
  24. World Bank (1994) Averting old-age crisis, Washington. World Bank, DCCrossRefGoogle Scholar

Copyright information

© ISEG 2015

Authors and Affiliations

  1. 1.Institute of Economics, CERSHungarian Academy of SciencesBudapestHungary
  2. 2.Budapest University of TechnologyBudapestHungary

Personalised recommendations