Optimal Pension Design in General Equilibrium

30 Pages Posted: 31 Jul 2012  

Hans Fehr

University of Würzburg - Institute of Economics and Social Sciences

Johannes Uhde

University of Wuerzburg

Date Written: August 1, 2012

Abstract

The present paper aims to quantify efficiency properties of real world social security systems of various institutional designs in order to identify an optimal pension design. Starting from a benchmark economy without social security, we introduce alternative pension systems and compare the costs arising from liquidity constraints as well as labor and savings distortions versus the benefits from insurance provision against income and lifespan uncertainty. Our findings highlight strong efficiency losses arising from both means-testing pension benefits against private assets and restricting the contribution base while indicating a positive impact of means-testing flat benefits against earnings-related benefits within pension systems resting on several tiers. Furthermore, our results suggest that the negative correlation between pension progressivity and pension generosity may be justified on efficiency grounds. In our model a single-tier universal earnings-related pension system yields the highest efficiency gains dominating flat benefits as well as two-tier systems of any form.

Keywords: stochastic OLG model, flat vs. earnings-related pension, means-testing

JEL Classification: C68, H55

Suggested Citation

Fehr, Hans and Uhde, Johannes, Optimal Pension Design in General Equilibrium (August 1, 2012). Netspar Discussion Paper No. 08/2012-022. Available at SSRN: https://ssrn.com/abstract=2120373 or http://dx.doi.org/10.2139/ssrn.2120373

Hans Fehr (Contact Author)

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
D-97070 Wuerzburg
Germany
0931- 31 29 72 (Phone)
0931- 888 71 29 (Fax)

Johannes Uhde

University of Wuerzburg ( email )

Sanderring 2
Wuerzburg, D-97070
Germany

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