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

  • András Simonovits
Original Article


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 %.


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

JEL Classification

H53 H24 


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Copyright information

© ISEG 2015

Authors and Affiliations

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

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