The Impact of Compulsory Retirement Savings Contributions on Lifetime Welfare

47 Pages Posted: 18 Aug 2015

See all articles by Wei-Ting Pan

Wei-Ting Pan

University of Technology Sydney (UTS) - Faculty of Business

Susan Thorp

The University of Sydney Business School

Date Written: August 18, 2015

Abstract

In private pre-funded retirement savings systems, workers can be compelled by regulation to make minimum contributions to retirement accounts. We examine the impact of compulsory contributions into retirement savings (superannuation) accounts on individuals' lifetime consumption and wealth using a continuous-time life-cycle model calibrated to the Household, Income and Labour Dynamic in Australia (HILDA) survey data. Simulations of optimal paths from the calibrated model show that the consumption of lower wealth individuals is severely constrained by compulsory savings, resulting in a sizeable welfare loss. In response, we propose a time varying contribution rate that mitigates the welfare loss while enhancing retirement wealth.

Keywords: Defined Contribution Plan, Structural Life Cycle Model, Dynamic Programming

JEL Classification: C61, E21, G11

Suggested Citation

Pan, Wei-Ting and Thorp, Susan, The Impact of Compulsory Retirement Savings Contributions on Lifetime Welfare (August 18, 2015). 28th Australasian Finance and Banking Conference, Available at SSRN: https://ssrn.com/abstract=2645570 or http://dx.doi.org/10.2139/ssrn.2645570

Wei-Ting Pan (Contact Author)

University of Technology Sydney (UTS) - Faculty of Business ( email )

Australia

Susan Thorp

The University of Sydney Business School ( email )

Abercrombie Building
H70
The University Of Sydney, NSW 2006
Australia
0290366354 (Phone)

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