The Design and Welfare Implications of Mandatory Pension Plans

51 Pages Posted: 8 Jul 2019 Last revised: 21 Oct 2020

See all articles by Linda Sandris Larsen

Linda Sandris Larsen

Copenhagen Business School

Claus Munk

Copenhagen Business School

Date Written: October 20, 2020

Abstract

In a rich, calibrated life-cycle model, we show that well-designed mandatory pension plans significantly improve the welfare of individuals procrastinating on savings or not investing in stocks, and even improve rational individuals' welfare through a return tax advantage and fair annuitization. For a group of heterogeneous savers, in terms of preferences and sophistication, the best plan has contributions of 9% of income from age 30, a glidepath investment strategy, payouts following a variable lifelong annuity, and options to choose a different investment strategy and to de-select the annuitization feature. This plan generates an average welfare gain of $233,000 per individual.

Keywords: Retirement savings, life cycle, consumption, investment, annuitization, welfare, procrastination, non-participation

JEL Classification: D91, G11, D14, E21, J32

Suggested Citation

Larsen, Linda Sandris and Munk, Claus, The Design and Welfare Implications of Mandatory Pension Plans (October 20, 2020). Available at SSRN: https://ssrn.com/abstract=3415132 or http://dx.doi.org/10.2139/ssrn.3415132

Linda Sandris Larsen

Copenhagen Business School ( email )

Solbjerg Plads 3, A5
Frederiksberg, 2000
Denmark

Claus Munk (Contact Author)

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/view/clausmunk/home

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