This article characterizes optimal social security in economies with agents who exhibit loss aversion. Two forms of loss aversion are explored. In the first, workers have a fixed retirement age and are loss averse over private savings. This motivates a more generous social security program. In the second, workers do no private savings but can choose their retirement age, exhibiting loss aversion over the foregone leisure time from delayed retirement. Social security benefits consequently rise steeper with retirement age and an earlier normal retirement age is optimal. In both cases, optimal policy is highly sensitive to the introduction of loss averse preferences.
BaillonAurélienBleichrodtHanSpinuVitalie. 2020. “Searching for the Reference Point.” Management Science66 (1): 93–112. https://doi.org/10.1287/mnsc.2018.3224.
4.
BehaghelLucBlauDavid M.. 2012. “Framing Social Security Reform: Behavioral Responses to Changes in the Full Retirement Age.” American Economic Journal: Economic Policy4 (4): 41–67. https://doi.org/10.1257/pol.4.4.41.
5.
BernheimB. DouglasFradkinAndreyPopovIgor. 2015. “The Welfare Economics of Default Options in 401(k) Plans.” American Economic Review105 (9): 2798–837. https://doi.org/10.1257/aer.20130907.
6.
BernheimB. DouglasTaubinskyDmitry. 2018. “Behavioral Public Economics.” In Handbook of Behavioral Economics: Foundations and Applications, vol. 1, edited by B. Douglas Bernheim, Stefano DellaVigna, and David Laibson, North-Holland.
CaselliFrancescoFeyrerJames. 2007. “The Marginal Product of Capital.” The Quarterly Journal of Economics122 (2): 535–68. https://doi.org/10.1162/qjec.122.2.535.
9.
ChettyRaj. 2015. “Behavioral Economics and Public Policy: A Pragmatic Perspective.” American Economic Review105 (5): 1–33. https://doi.org/10.1257/aer.p20151108.
10.
ChettyRajLooneyAdamKroftKory. 2009. “Salience and Taxation: Theory and Evidence.” American Economic Review99 (4): 1145–77. https://doi.org/10.1257/aer.99.4.1145.
11.
DemangeGabrielleLaroqueGuy. 2000. “Social Security, Optimality, and Equilibria in a Stochastic Overlapping Generations Economy.” Journal of Public Economic Theory2 (1): 1–23. https://doi.org/10.1111/1097-3923.00027.
12.
DenkOliverMichauJean-Baptiste. 2018. “Optimal Social Security with Imperfect Tagging.” The Scandinavian Journal of Economics120 (3): 717–62. https://doi.org/10.1111/sjoe.12250.
13.
DiamondPeter. 2006. “Optimal Tax Treatment of Private Contributions for Public Goods with and Without Warm Glow Preferences.” Journal of Public Economics90 (4): 897–919. https://doi.org/10.1016/j.jpubeco.2005.06.001.
14.
DiamondPeterGruberJonathan. 1999. “Social Security and Retirement in the United States.” In Social Security and Retirement Around the World, edited by Jonathan Gruber and David A. Wise, 437–473. Chicago: University of Chicago Press.
DiamondPeter A.MirrleesJames A.. 1986. “Payroll-Tax Financed Social Insurance with Variable Retirement.” The Scandinavian Journal of Economics88 (1): 25–50. https://doi.org/10.2307/3440271.
EisenhuthRolandGrunewaldMara. 2020. “Auctions with Loss-averse Bidders.” International Journal of Economic Theory16 (2): 129–52. https://doi.org/10.1111/ijet.12189.
19.
FeldsteinMartin. 1985. “The Optimal Level of Social Security Benefits.” The Quarterly Journal of Economics100 (2): 303–20. https://doi.org/10.2307/1885383.
20.
FeldsteinMartinLiebmanJeffrey B.. 2002. “Social security.” In Handbook of Public Economics, edited by Alan J. Auerbach and Martin Feldstein, 4:2245–2324. North-Holland. https://doi.org/10.1016/S1573-4420.
21.
FetherstonhaughDavidRossLee. 1999. “Framing Effects and Income Flow Preferences in Decisions about Social Security.” In Behavioral Dimensions of Retirement Economics, edited by Henry J. Aaron, 187–209. Washington DC: Brookings Institution Press / Russell Sage Foundation.
22.
FindleyT. ScottCaliendoFrank N.. 2009. “Short Horizons, Time Inconsistency, and Optimal Social Security.” International Tax and Public Finance16 (4): 487–513. https://doi.org/10.1007/s10797-009-9115-2.
23.
Fryer, JrRoland G.LevittSteven D.ListJohn A.SadoffSally. 2012. “Enhancing the Efficacy of Teacher Incentives through Loss Aversion: A Field Experiment.” NBER Working Paper 18237. Cambridge, MA: National Bureau of Economic Research. https://doi.org/10.3386/w18237.
24.
GabaixXavier. 2019. “Behavioral Inattention.” In Handbook of Behavioral Economics: Foundations and Applications, edited by B. Douglas Bernheim, Stefano DellaVigna, and David Laibson, 2:261–343. North-Holland. https://doi.org/10.1016/bs.hesbe.2018.11.001.
GruberJonathanWiseDavid A., eds. 1999. Social Security and Retirement Around the World. Chicago: University of Chicago Press.
27.
HomonoffTatiana A. 2018. “Can Small Incentives Have Large Effects? The Impact of Taxes Versus Bonuses on Disposable Bag Use.” American Economic Journal: Economic Policy10 (4): 177–210. https://doi.org/10.1257/pol.20150261.
28.
HorowitzJohn K.McConnellKenneth E.. 2002. “A Review of WTA/WTP Studies.” Journal of Environmental Economics and Management44 (3): 426–47. https://doi.org/10.1006/jeem.2001.1215.
29.
HossainTanjimListJohn A.. 2012. “The Behavioralist Visits the Factory: Increasing Productivity Using Simple Framing Manipulations.” Management Science58 (12): 2151–67. https://doi.org/10.1287/mnsc.1120.1544.
30.
KahnemanDanielSugdenRobert. 2005. “Experienced Utility As a Standard of Policy Evaluation.” Environmental and Resource Economics32 (1): 161–81. https://doi.org/10.1007/s10640-005-6032-4.
31.
KahnemanDanielTverskyAmos. 1979. “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica47 (2): 263–91. https://doi.org/10.2307/1914185.
KumruCagri S.ThanopoulosAthanasios C.2011. “Social Security Reform with Self-control Preferences.” Journal of Public Economics95 (7): 886–99. https://doi.org/10.1016/j.jpubeco.2011.03.001.
35.
MadrianBrigitte C.SheaDennis F.. 2001. “The Power of Suggestion: Inertia in 401 (k) Participation and Savings Behavior.” The Quarterly Journal of Economics116 (4): 1149–87. https://doi.org/10.1162/003355301753265543.
O’DonoghueTedSprengerCharles. 2018. “Reference-Dependent Preferences.” In Handbook of Behavioral Economics: Foundations and Applications, edited by B. Douglas Bernheim, Stefano DellaVigna, and David Laibson, 1:1–77. North-Holland. https://doi.org/10.1016/bs.hesbe.2018.07.003.
39.
PagelMichaela. 2017. “Expectations-Based Reference-Dependent Life-Cycle Consumption.” The Review of Economic Studies84 (2): 885–934. https://doi.org/10.1093/restud/rdx003.
40.
PayneJohn W.ShuSuzanneWebbElizabethSagaraNamika. 2015. “Individual Heterogeneity in Loss Aversion and Its Impact on Social Security Claiming Decisions.” RRC Paper NB15-07. Cambridge, MA: National Bureau of Economic Research.
41.
ShefrinHersh M.ThalerRichard H.. 2004. “Mental accounting, saving, and self-control.” In Advances in Behavioral Economics, edited by Colin F. Camerer, 395–428. Princeton: Princeton University Press.
ThalerRichard H.BenartziShlomo. 2004. “Save More Tomorrowä: Using Behavioral Economics to Increase Employee Saving.” Journal of Political Economy112 (S1): 164–87. https://doi.org/10.1086/380085.
44.
TverskyAmosKahnemanDaniel. 1991. “Loss Aversion in Riskless Choice: A Reference-Dependent Model.” The Quarterly Journal of Economics106 (4): 1039–61. Publisher: Oxford University Press. https://doi.org/10.2307/2937956.
45.
TverskyAmosKahnemanDaniel. 1992. “Advances in Prospect Theory: Cumulative Representation of Uncertainty.” Journal of Risk and Uncertainty5 (4): 297–323. https://doi.org/10.1007/BF00122574.
46.
YewSiew LingZhangJie. 2009. “Optimal Social Security in a Dynastic Model with Human Capital Externalities, Fertility and Endogenous Growth.” Journal of Public Economics93 (3): 605–19. https://doi.org/10.1016/j.jpubeco.2008.10.005.
