ON THE TIME CONSISTENCY OF THE GOVERNMENTS SOCIAL-SECURITY BENEFIT POLICY

It is shown that the government's social security benefit policy may be time-inconsistent when a worker's future benefit depends on his labor earnings history. When the future benefit is tied to current labor supply, the benefit will distort the worker's labor supply decision ex ante of retirement, but not ex post. Any excess burden associated with the government's benefit policy is taken into account in the open loop policy game, but is ignored in the closed loop game. This will generally imply that the benefit will be larger under the closed loop rule, ceteris paribus.