Designing an Optimal Public Pension System

This paper uses a two-period overlapping generations model in order to provide a theoretical design for an optimal public pension system based on a partial equilibrium analysis. Household preferences only depend on two periods consumption and leisure and is homogeneous of degree m with respect to consumption in the working and retired periods. We present characteristic features of an optimal public pension system in this paper. First, differences in the population growth rate do not affect the relative level of the optimal net lifetime burden rate of each generation. Second, if m≠0 or m<1, the optimal public pension system can be expressed explicitly. Third, the difference between the market time-preference rate and social time-preference rate provides a crucial insight into the optimal burden rate of each generation.