Reference‐dependent preferences, time inconsistency, and pay‐as‐you‐go pensions

The classic Aaron–Samuelson result argues that pay-as-you-go (PAYG) pension schemes cannot coexist with higher-return, private, retirement-saving schemes. ensuing literature shows if agents voluntarily undersave for retirement due to myopia or time-inconsistency, then a paternalistic, rationale PAYG pensions arises only voluntary saving is fully crowded out because of binding borrowing constraint. This paper generalizes the discussion reference-dependent utility setup Kőszegi and Rabin (2009) where undersaving happens naturally. No constraint imposed. We show it possible offer non-paternalistic, welfare return-dominated, saving.