Implications of Behavioural Economics for Mandatory Individual Account Pension Systems

OECD Working Papers on Insurance and Private Pensions No. 11

29 Pages Posted: 11 Aug 2008

See all articles by Waldo Tapia

Waldo Tapia

affiliation not provided to SSRN

Juan Yermo

Organization for Economic Co-Operation and Development (OECD)

Date Written: July 1, 2007

Abstract

In individual account pension systems, members bear the risks and consequences of their investment decisions. If participants behave as predicted by economic theory, such responsibility would be welfare-enhancing as members would invest and hold a portfolio of financial assets with a risk-return combination consistent with their investment horizon, degree of risk aversion and the portfolio of other assets they hold, including their human capital and, where relevant, their home. Behavioural economists and empirical researches have shown that in reality members are not particularly good at handling their retirement savings, either because they lack the necessary cognitive ability to solve the optimization problem, because they have insufficient will power to execute it, or even sometimes because they are overconfident. This paper describes the extent to which plan members make active investment decisions in these systems and assesses the policy solutions that have been put forward to facilitate choice. The paper offers a comparative analysis of ten countries that have implemented investment choice in the accumulation stage of their individual account pension system.

Keywords: Pension funds, portfolio preferences, individual choice, individual accounts, investment

JEL Classification: J31, G11, G23, G18

Suggested Citation

Tapia, Waldo and Yermo, Juan, Implications of Behavioural Economics for Mandatory Individual Account Pension Systems (July 1, 2007). OECD Working Papers on Insurance and Private Pensions No. 11. Available at SSRN: https://ssrn.com/abstract=1217604 or http://dx.doi.org/10.2139/ssrn.1217604

Waldo Tapia (Contact Author)

affiliation not provided to SSRN

Juan Yermo

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

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