Socially optimal cap on pension contributions

In our model, the government operates a mandatory proportional pension system to substitute for the low life-cycle savings of the lower-paid myopes, while maintaining the incentives of the higher-paid, far-sighted in contributing to the system. The introduction of an appropriate cap on pension contribution (or its base) raises the optimal contribution rate, helping more the myopes and making more room for the saving of high-paid far-sighted workers. The cap has quite a weak impact on the social welfare in a relatively wide interval but the maximal welfare is higher than the capless welfare by 0.3-4.5%.