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Time inconsistency preferences and social security (2002)
| Content Provider | CiteSeerX |
|---|---|
| Author | Imrohoroglu, Ayse Imrohoroglu, Selahattin Joines, Douglas H. |
| Description | In this paper we examine the role of social security in an economy populated by overlapping generations of individuals with time-inconsistent preferences who face mortality risk, individual income risk, and borrowing constraints. Agents in this economy are heterogeneous with respect to age, employment status, retirement status, hours worked, and asset holdings. We consider two cases of time-inconsistent preferences. First, we model agents as quasi-hyperbolic discounters. They can be sophisticated and play a symmetric Nash game against their future selves; or they can be naive and believe that their future selves will exponentially discount. Second, we consider retrospective time inconsistency. We find that (1) there are substantial welfare costs to quasi-hyperbolic discounters of their time-inconsistent behavior, (2) social security is a poor substitute for a perfect commitment technology in maintaining old-age consumption, (3) there is little scope for social security in a world of quasi-hyperbolic discounters (with a short-term discount rate up to 15%), and, (4) the ex ante annual discount rate must be at least 10 % greater than seems warranted ex post in order for a majority of individuals with retrospective time inconsistency to prefer a social security tax rate of 10 % to no social security. Our findings question the effectiveness of unfunded social security in correcting for the undersaving resulting from time-inconsistent preferences. *An earlier version of this paper, dated June 14, 1999, circulated with the title “Myopia and Social Security. ” We |
| File Format | |
| Language | English |
| Publisher Date | 2002-01-01 |
| Publisher Institution | Proceedings of the North American Meeting of the Econometric Society |
| Access Restriction | Open |
| Subject Keyword | Warranted Ex Post Substantial Welfare Cost Social Security Tax Rate Time-inconsistent Preference Future Self Quasi-hyperbolic Discounter Short-term Discount Rate Mortality Risk Employment Status Time Inconsistency Preference Unfunded Social Security Social Security Perfect Commitment Technology Asset Holding Little Scope Old-age Consumption Individual Income Risk Title Myopia Retirement Status Ex Ante Annual Discount Rate Retrospective Time Inconsistency Symmetric Nash Game Poor Substitute Time-inconsistent Behavior |
| Content Type | Text |
| Resource Type | Article |
