Self-Control Preferences and Pension Means Testing

We investigate the effects of self-control preferences on household life cycle decisions, macroeconomic
outcomes, and the roles they play in determining optimal means testing of public old-age pensions. To that
end, we develop a stochastic overlapping generations model with heterogeneous households that have
Gul-Pesendorfer self-control preferences. First, we show that in economies with higher self-control costs
lifetime savings diminish, while labor supply and retirement are postponed to later ages. Hence, the fiscal
burden to fund the public pension system increases. Second, we examine the effects of increasing selfcontrol
costs in the context of age pension means testing with alternative taper rates at which the pension
benefit is withdrawn. We show that there is a negative relationship between self-control costs and taper
rates, i.e., populations with higher self-control costs prefer lower taper rates. We find that if self-control
costs are sufficiently high, a universal pension with a zero taper rate may be optimal.