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Reference‐dependent preferences, time inconsistency, and pay‐as‐you‐go pensions
Author(s) -
Andersen Torben M.,
Bhattacharya Joydeep,
Liu Qing
Publication year - 2021
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12972
Subject(s) - paternalism , economics , constraint (computer aided design) , pension , welfare , microeconomics , labour economics , finance , market economy , mechanical engineering , engineering
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.