Essays on Pension Policies and Temptation Preferences

This thesis explores the effectiveness of some government policies regarding retirement incomes, namely the Australian old age pension and mandatory retirement saving through superannuation. Using an overlapping generations model for a small open economy, I investigate the effect of introducing an adjustable (non-linear) taper rate to a means-tested public age pension. Unlike a linear taper rate, a non-linear taper rate can be adjusted without affecting eligibility for the pension. Both a progressive taper rate (that increases with income) and a regressive taper rate are considered. A strongly regressive non-linear test with a low average taper rate is marginally preferable to the best-performing linear test. Means testing the pension tends to favour higher income earners but introducing a non-linear test can reduce the welfare cost to lower and middle-income earners. The thesis then considers pension policies in the context of a population with Gul-Pesendorfer style self-control preferences, in which households experience temptation to over-consume in the near term and must exercise costly self-control to save for retirement. First, I consider the role of means testing a public pension and find that the benefits of the means test are smaller when self-control preferences are stronger as the expected cost savings are smaller than they would otherwise be, and the population increasingly values the pension as a commitment device. I also find that populations with higher self-control costs prefer lower taper rates on the pension means test, and a universal pension may be preferred if self-control costs are sufficiently high. Second, two- and three-period life-cycle models are used to examine the effectiveness of a policy maker directly mandating that households save for retirement. I find that increasing the contribution rate on a savings mandate always leads to a utility gain for households with self-control preferences provided voluntary household savings are not crowded out. For households without self-control preferences there are no utility losses provided voluntary savings are not crowded out. A savings mandate will not necessarily increase household savings unless voluntary savings are fully crowded out. The optimal choice of contribution rate was found to largely depend upon the agent’s discount factor rather than the intensity of the self-control preferences.

Grantor dc:publisher

UNSW, Sydney

Year dc:date

2022

Author dc:creator

• Wheadon, Daniel ; https://orcid.org/0000-0003-3799-5358

• Age Pension
• Overlapping generations
• Self Control Preferences
• Non-linear
• Means Test
• anzsrc-for: 38 ECONOMICS
• anzsrc-for: 380112 Macroeconomics (incl. monetary and fiscal theory)
• anzsrc-for: 3801 Applied economics

Statement dc:rights

• open access
• CC BY 4.0
• free_to_read

Licence

• https://purl.org/coar/access_right/c_abf2
• https://creativecommons.org/licenses/by/4.0/

Language dc:language

en

Identifier

https://doi.org/10.26190/unsworks/24196

OAI identifier oai:identifier

oai:unsworks.library.unsw.edu.au:1959.4/100489