This study analyses the relative performance in terms of welfare of the current US PAYG system compared to an array of cost equivalent alternative specifications of means‐tested pension programmes. We conduct our analysis under two different settings. While in the first setting, individuals have standard preferences; in the second setting, individuals have self‐control preferences. We show that the implications of the reform substantially differ across the two settings.

This study analyzes the relative performance in terms of welfare of the current U.S. PAYG system compared to an array of cost equivalent alternative specifications of means-tested pension programs. We conduct our analysis under two different settings. While in the first setting, individuals have standard preferences, in the second setting individuals have self-control preferences. We show that the implications of the reform substantially differs across the two settings.

This paper examines the impact of labor and capital income taxes in a stochastic overlapping generations (OLG) economy where agents face borrowing constraints and their behavior is temptation driven. We quantitatively establish that the existence of temptation in preferences may function as an opposing mechanism to modeling choices, such as liquidity constraints, life‐cycle structure, and idiosyncratic earnings risks, that are critical in delivering a positive capital income tax rate. We show that a sufficiently large measure of individuals having self‐control preferences, or alternatively, a sufficiently high cost of exercising self‐control, puts downward pressure on the optimal capital income tax rate. (JEL E21, E62, H55)

This paper examines the impact of various fiscal policies, namely, taxes on consumption, labor and capital when agents have self-control preferences. Agents trade in a stochastic overlapping generations economy while facing borrowing constraints. We quantitatively show that modelling choices, such as, liquidity constraints, life-cycle structure and idiosyncratic earnings risks, that were previously considered to be critical in delivering a positive capital income tax, need not be binding in this regard. We argue and quantitatively show that for a sufficiently large measure of individuals having self-control preferences instead of CRRA preferences, or alternatively, for a sufficiently high cost of exercising self control when all individuals are self-control types, the optimal capital income tax is zero. Given there is strong empirical and experimental evidence regarding the existence of self-control problems, our model provides quite an interesting insight: as agents' self-control costs rise, the optimal capital income tax rate will converge to Chamley and Judd value.

This paper analyzes a fully funded social security system under the assumption that agents face temptation issues. Agents are required to save through individually managed Personal Security Accounts without, and with mandatory annuitization. When the analysis is restricted to CRRA preferences our results are congruent with the literature in indicating that the complete elimination of social security is among the reform scenarios that maximize welfare. However, when self control preferences are introduced, and as the intensity of self control becomes progressively more severe the “social security elimination” scenario loses ground very rapidly. In fact, in the case of relatively severe temptation the elimination of social security becomes the least desirable alternative. Under the light of the above findings, any reform proposal regarding the social security system should consider departures from standard preferences to preference specifications suitable for dealing with preference reversals.

In the first essay, we analyze the welfare effects of an unfunded security system. We do so using an overlapping generations economy wherein agents have self-control preferences, face mortality risk, individual income risk, and borrowing constraints. Given our specification of preferences, unfunded security helps reduce the agents' temptation to consume in every period; consequently, the welfare costs it otherwise entails are substantially mitigated. While both security and self-control when considered separately reduce welfare, their combination renders this effect considerably less severe. Moreover, if the cost of resisting temptation is very high, the introduction of security might even improve welfare.In the second essay I use a dynamic stochastic general equilibrium overlapping generations model to examine the relevance of unfunded security in an environment where both CRRA and self-control agents co-exist. I identify conditions under which the existence of CRRA agents in the economy makes self-control agents better-off. I, therefore, conclude that temptation prevalence across individuals in the economy and temptation intensity within individuals can be considered to be substitutes in reducing the welfare cost associated with unfunded security for self control agents.In the third essay we analyze a fully funded security system under the assumption that agents face temptation issues. Agents are required to save through individually managed Personal Security Accounts without, and with mandatory annuitization. When the analysis is restricted to CRRA preferences our results are congruent with the literature in indicating that the complete of security is the reform scenario that maximizes welfare. However, when self control preferences are introduced, and as the intensity of self control becomes progressively more severe the social security elimination scenario loses ground very rapidly. In fact, in the case of very severe temptation the of security becomes the least desirable alternative. Under the light of the above findings, any reform proposal regarding the security system should consider departures from standard preferences to preference specifications suitable for dealing with preference reversals.

This paper analyzes a fully funded social security system under the assumption that agents face temptation issues. Agents are required to save through individually managed Personal Security Accounts without, and with mandatory annuitization. When the analysis is restricted to CRRA preferences our results are congruent with the literature indicating that the complete elimination of social security is the reform scenario that maximizes welfare improvement. However, when self control preferences are introduced, and as the intensity of self control becomes progressively more severe the "social security elimination" scenario loses ground very rapidly. In fact, in the case of very severe temptation the elimination of social security becomes the least desirable alternative. Under the light of the above findings, any reform proposal regarding the social security system should consider departures from standard preferences to preference specifications suitable for dealing with preference reversals.

This paper analyzes a fully funded social security system under the assumption that agents face temptation issues. Agents are required to save through individually managed Personal Security Accounts without, and with mandatory annuitization. When the analysis is restricted to CRRA preferences our results are congruent with the literature in indicating that the complete elimination of social security is among the reform scenarios that maximize welfare. However, when self control preferences are introduced, and as the intensity of self control becomes progressively more severe the "social security elimination" scenario loses ground very rapidly. In fact, in the case of relatively severe temptation the elimination of social security becomes the least desirable alternative. Under the light of the above …ndings, any reform proposal regarding the social security system should consider departures from standard preferences to preference speci…cations suitable for dealing with preference reversals. JEL Classi…cation: E6; H55 Keywords: funded social security; unfunded social security; self-control preferences We thank David N. DeJong, Daniele Coen-Pirani, John Du¤y, Jack Ochs, John Piggott, and participants at the 2009 Midwest Macroeconomics Meetings, at the Behavioral Public Economics Workshop of the 10th CESifo Venice Summer Institute and at the Athens University of Economics and Business research seminar for their comments. Cagri S. Kumru would like to thank the Australian Research Council for …nancial support. This is a considerably enhanced version of a paper that was previously circulated under the title "Social Security Reform and Temptation" (CESifo Working Paper No. 2778). ySchool of Economics, UNSW, Sydney, NSW, 2052, Australia. E-mail:cs.kumru@unsw.edu.au zCouncil of Economic Advisers, Ministry of Finance, Athens, Greece and UADPhilEcon, University of Athens, 5-7 Nikis St. 10180, Athens, Greece. E-mail: a.thanopoulos@min…n.gr

We analyze the welfare effects of an unfunded social security system. We do so using an overlapping generations economy wherein agents have self-control preferences, face mortality risk, individual income risk, and borrowing constraints. Given our specification of preferences, unfunded social security helps reduce the agents’ temptation to consume in every period; consequently, the welfare costs it otherwise entails are substantially mitigated. While both social security and self-control when considered separately reduce welfare, their combination renders this effect considerably less severe. Moreover, if the cost of resisting temptation is very high, the introduction of social security might even improve welfare.