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 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