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Myopia and pensions in general equilibrium

journal contribution
posted on 2013-01-01, 00:00 authored by F Caliendo, Emin Gahramanov
The US social security tax rate has doubled in the last half century.

Does the degree of myopic behavior that we observe in the US justify the size of the social security program? To study this question we build a computable general equilibrium model that is composed of life-cycle permanent-income consumers who save optimally and “hand-to-mouth” consumers who just consume their disposable income. Our model is a continuous-time, general equilibrium extension of the model by Cremer et al. (Int Tax Public Financ 15(5):547–562, 2008), though we abstract from the redistributive function of social security to focus on myopia. Retirement is a choice variable in our model and the social security program is designed to mimic the US program in which the annuity value of benefits increases with the retirement age. Also, we allow for delayed claiming beyond the date of retirement. The model matches a variety of important data targets relating to saving and retirement. We find that small reductions in the social security tax rate provide significant welfare gains to both groups of consumers.

History

Journal

Journal of economics and finance

Volume

37

Issue

3

Pagination

375 - 401

Publisher

Springer Science & Business Media

Location

Memphis, Tenn.

ISSN

1055-0925

eISSN

1938-9744

Language

eng

Publication classification

C1 Refereed article in a scholarly journal

Copyright notice

2013, Springer

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