Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 609: Optimal Actuarial Fairness in Pension Systems - a Note

John Hassler () and Assar Lindbeck ()
Additional contact information
John Hassler: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 91 Stockholm, Sweden
Assar Lindbeck: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 91 Stockholm, Sweden

Abstract: A rationale for a compulsory pension system is that the government wants to correct supposedly myopic behavior by the individuals. Given the existence of such a system, we calculate the optimal relation between marginal contributions and benefits, i.e., the optimal degree of marginal actuarial fairness, as seen from the point of view of the individuals or of the government. The following is shown to hold under general assumptions of individual utility: The optimal degree of marginal actuarial fairness increases in the rate of return in the social security system and decreases in the government’s rate of time preference. If the government’s rate of time preference is lower than the individual’s, the government gains more than the individuals by making the system more actuarially fair. It is also shown that labor supply always increases when the link between marginal contributions and benefits is strengthened.

Keywords: compulsory pension; marginal actuarial fairness

JEL-codes: H55

14 pages, November 3, 1997

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