Pareto-Improving Transition to Fully Funded Pensions Under Myopia

49 Pages Posted: 8 May 2020

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Joydeep Bhattacharya

Iowa State University - Department of Economics

Marias H. Gestsson

affiliation not provided to SSRN

Date Written: April 2020

Abstract

Under dynamic efficiency, a pay-as-you-go (PAYG) pension scheme helps the current generation of retirees but hurts future generations because they are forced to save via a return-dominated scheme. Abandoning it is deemed welfare-improving but typically not for all generations. But what if agents are present-biased (hence, undersave for retirement) and the "paternalistically motivated forced savings" component of a PAYG scheme motivated its existence in the first place? This paper shows it is possible to transition from such a PAYG scheme on to a higher return, mandated fully-funded scheme; yet, no generation is hurt in the process. The results inform the debate on policy design of pension systems as more and more policy makers push for the transition to take place but are forced to recognize that current retirees may get hurt along the way.

Keywords: mandatory pensions, Pareto criterion pension crowding out, Present-Biased Preferences, transition

JEL Classification: D3, D91, E6, H55

Suggested Citation

Andersen, Torben M. and Bhattacharya, Joydeep and Gestsson, Marias H., Pareto-Improving Transition to Fully Funded Pensions Under Myopia (April 2020). CEPR Discussion Paper No. DP14650, Available at SSRN: https://ssrn.com/abstract=3594281

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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DK-8000 Aarhus C
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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Joydeep Bhattacharya

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-5886 (Phone)
515-294-0221 (Fax)

Marias H. Gestsson

affiliation not provided to SSRN

No Address Available

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