The Design and Welfare Implications of Mandatory Pension Plans

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, and even improve most 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 10% 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 modify the annuitization feature. This plan generates an average welfare gain of $299,000 per individual.

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

JEL Classification: D14, D15, G11, G41, G51