On the optimality of public pensions in an economy with life-cyclers and myopes

Abstract

In this paper, we develop a two-period overlapping generations model with two types of individuals, life-cyclers and myopes. We revisit Feldstein's problem by deriving the optimal level of social security using a social welfare function à la Samuelson (rather than à la Lerner). In opposition to the Lerner solution, our optimal pension benefit exhibits several interesting properties (dynamic efficiency, egalitarism, easy implementation). Then the opportunity to move to a partially funded system is examined. It turns out that a partially funded system ensures the equality of utility within and across generations. The effective use of funding opportunities is less a question of rate of return than a question of equal treatment of individuals. © 2002 Elsevier Science B.V. All rights reserved.