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The rising role of intra- and intergenerational transfers (e.g. basic income, child benefit and public pensions) characterises modern economies, yet most models depicting these transfers are too sophisticated for a wider but mathematically trained audience. This book presents simple models to fill the gap. The author considers a benevolent government maximizing social welfare by anticipating citizens' shortsighted reaction to the transfer rules. The resulting income redistribution is analyzed for low tax morale, strong labor disutility and heterogeneous life expectancy. Key issues that the book addresses include the socially optimal pension contribution rate, retirement age, and redistribution programs. The author concludes by removing some strong restrictions and introducing median voter, incomplete information and dynamic complications.

The rising role of intra- and intergenerational transfers (e.g. basic income, child benefit and public pensions) characterises modern economies, yet most models depicting these transfers are too sophisticated for a wider but mathematically trained audience. This book presents simple models to fill the gap. The author considers a benevolent government maximizing social welfare by anticipating citizens' shortsighted reaction to the transfer rules. The resulting income redistribution is analyzed for low tax morale, strong labor disutility and heterogeneous life expectancy. Key issues that the book addresses include the socially optimal pension contribution rate, retirement age, and redistribution programs. The author concludes by removing some strong restrictions and introducing median voter, incomplete information and dynamic complications. The book will be of value for graduate students and researchers interested in public economics, especially in public and private pensions.

In 2011, the Hungarian government introduced special seniority pensions (Female40): Females, who have accumulated at least 40 years of eligibility (related to the length of contributions), can retire at any age without actuarial benefit reduction. The elimination of other early retirement schemes in 2012 and slowly rising real wages made the policy change even more popular: the lifetime benefit was maximised at the earliest age of retirement. Since 2016, real wages have been growing rather fast; making delayed retirement attractive. Without being noticed by the public at large, Female40 has become a boomerang for its former beneficiaries as immediate retirement from 2014 causes losses rather than gains to the foregoing retirees.

We reconsider the problem of indexation of public pensions, emphasizing that similar contribution paths should imply similar benefit paths. This robustness criterion is only satisfied by full wage indexing, which in turn requires the politically unpopular reduction of the accrual rates. To minimize the redistribution from low-earning short-lived citizens to high-earning long-lived ones, progressive benefits should be introduced.

In 2011, the Hungarian government introduced seniority pensions (Female40): females, who have been accumulating at least 40 years of eligibility (related to the length of contributions), can retire at any age without actuarial benefit reduction. The elimination of other early retirement scheme in 2012 and slowly rising real wages made the program even more popular: the lifetime benefit was maximized at the earliest retirement. Since 2016, real wages have been growing rather fast; making delay attractive. Without being recognized, Female40 has become a boomerang: immediate retirement from 2014 causes loss rather than gain to the retiree of Female40.

We consider three transfer models with a representative individual who discounts the utility of the merit good with respect to the standard one's. In each model, a paternalistic government taxes the consumer and transfers him additional merit goods in return. The private purchase of the merit goods is cheaper than the transfer. Even if the optimal transfer system is welfare superior to the transfer-free system, a system with much lower transfer may be inferior, therefore this welfare gap should be jumped. Various pension modelers (e.g. Feldstein, 1985; van Groezen, Leers and Meijdam, 2003) overlooked this problem and drew wrong conclusions.

In his seminal model (Feldstein, 1985), the government operates a social security system to counter the representative worker's myopia. (i) For a complete myope, he determined a sizable optimal tax rate (and the corresponding benefit level). (ii) For a partially shortsighted worker, he determined another optimum, which was much lower, possibly zero. Departing from Feldstein, I take into account that neither a paternalistic government nor a cautious bank tolerates long-term negative saving, and then even in (ii), the government may choose the first rather than the second optimum. Having revised it, Feldstein's model regains its place in the textbooks.

Abstract
By 2008, the Hungarian pension system had grown too generous (with the average pension to average net wage ratio equaling 70%) and the implied contribution rate (32%) was hindering growth (dropping to 1% in 2007). When the international economic and financial crisis deprived Hungary of normal credits, the country's government turned to international organizations for help. The most spectacular element of the conditions attached to the bailout package was the short and long-term reduction of pension benefits. Within months, the Hungarian government eliminated the unsustainable 13th month benefit, reduced health-insurance contribution rates, replaced wage-price indexation with price indexation and drastically increased the normal retirement age in the medium-run. The newly elected conservative party practically shut down the second pillar and used up the released capital not only to reduce the government deficit and debt but also to finance public expenditures.

In our model, the government operates a mandatory proportional (DC) pension system to substitute for the low life-cycle savings of the lower-paid myopic workers, while maintaining the incentives of the higher-paid far-sighted ones in contributing to the system. The introduction of an appropriate cap on pension contribution (or its base)—excluding the earnings above the cap from the contribution base—raises the optimal contribution rate, helping more the lower-paid myopic workers and reserving enough room for the saving of higher-paid far-sighted ones. The social welfare is almost independent of the cap in a relatively wide interval but the maximal welfare is higher than the capless welfare by 0.3–4.5 %. ; info:eu-repo/semantics/publishedVersion