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A NOTE ON SOCIAL SECURITY WELFARE WITH SELF-CONTROL PROBLEMS

Published online by Cambridge University Press:  15 July 2011

Alessandro Bucciol
Alessandro Bucciol*
Affiliation:
University of Verona, University of Amsterdam and Netspar
*
Corresponding author: Alessandro Bucciol, Department of Economics, University of Verona, Viale Università 4, 37129 Verona, Italy; e-mail: alessandro.bucciol@univr.it.
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Abstract

We develop an overlapping-generations model for a closed economy with uncertainty on labor income and mortality risk to show that unfunded social security programs may increase welfare in economies where agents are affected by self-control problems à la Gul and Pesendorfer (2001, Econometrica 69, 1403). We depart from the existing literature by setting the agent's preference parameters to match target levels of macro-variables observed in the real U.S. economy. In our approach, economies with tempted and nontempted agents are indistinguishable in terms of aggregate consumption, labor, and saving behavior when social security provides a replacement rate of 40% (as in the United States). This situation makes agents bear costly self-control problems over more years. Our simulations indicate that social security improves welfare with degrees of temptation equal to 11% or higher. A social security program with a replacement rate of 40% finds support for degrees of temptation not lower than 15%.

Keywords

Social SecurityTemptation Disutility ModelSelf-Control ProblemsOverlapping-Generation Models
Type
Notes
Information
Macroeconomic Dynamics , Volume 15 , Issue 4 , September 2011 , pp. 579 - 594
Copyright
Copyright © Cambridge University Press 2011

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