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Reference-dependent preferences, time inconsistency, and pay-as-you-go pensions

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  • Andersen, Torben M.
  • Bhattacharya, Joydeep
  • Liu, Qing
Abstract
The classic Aaron–Samuelson result argues that pay-as-you-go (PAYG) pension schemes cannot coexist with higher-return, private, retirement-saving schemes. The ensuing literature shows if agents voluntarily undersave for retirement due to myopia or time-inconsistency, then a paternalistic, rationale for PAYG pensions arises only if voluntary retirement saving is fully crowded out because of a binding borrowing constraint. This paper generalizes the discussion to the reference-dependent utility setup of Kőszegi and Rabin (2009) where undersaving happens naturally. No borrowing constraint is imposed. We show it is possible to offer a non-paternalistic, welfare rationale for return-dominated, PAYG pensions to coexist with private, retirement saving.

Suggested Citation

  • Andersen, Torben M. & Bhattacharya, Joydeep & Liu, Qing, 2021. "Reference-dependent preferences, time inconsistency, and pay-as-you-go pensions," ISU General Staff Papers 202107010700001813, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:202107010700001813
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    Cited by:

    1. Kirill Moiseev, 2024. "Modeling the transition from pay-as-you-go to a fully funded pension system in Russia," Papers 2410.14004, arXiv.org.
    2. Torben M. Andersen & Joydeep Bhattacharya & Qing Liu, 2023. "Can optimal unfunded public pensions co-exist with voluntary private retirement savings?," Indian Economic Review, Springer, vol. 58(1), pages 237-251, July.
    3. Moiseyev, K., 2024. "Modeling the transition from pay-as-you-go to a fully funded pension system in Russia," Journal of the New Economic Association, New Economic Association, vol. 64(3), pages 30-52.
    4. Daniel Montolio & Amedeo Piolatto & Luca Salvadori, 2022. "Financing public education when agents have retirement concerns," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1559-1580, October.

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