The economy-wide effects of mandating private retirement incomes

50 Pages Posted: 6 Apr 2022

See all articles by George Kudrna

George Kudrna

University of New South Wales (UNSW)

Date Written: March 24, 2022

Abstract

This paper investigates the economy-wide effects of mandating private (employment-related) pensions. It draws on the Australian experience with its Superannuation Guarantee legislation which mandates contributions to private retirement (superannuation) accounts. Our key objective is to quantify the long-run implications of alternative mandatory superannuation contribution rates for household economic decisions over the life cycle, household welfare, and macroeconomic and fiscal aggregates. To that end, we develop a stochastic, overlapping generations (OLG) model with labor choice and endogenous retirement, which distinguishes between (i) ordinary private (liquid) assets and (ii) superannuation (illiquid) assets. The benchmark model is calibrated to the Australian economy, fitted to Australian demographic, household survey and macroeconomic data, and accounting for a detailed representation of Australia’s government policy, including its mandatory superannuation system. The model is then applied to simulate the effects of alternative mandatory superannuation contribution rates, with a specific focus on the counterfactual of a legislated future rate of 12% of gross wages. Based on the model simulations, we show that in the long run, this increased mandate generates larger average household wealth, output and consumption per capita and (rational) household welfare across income distribution.

Keywords: Private Pension, Social Security, Income Taxation, Labor Supply, Endogenous Retirement, Stochastic General Equilibrium

JEL Classification: J32, H55, H31, J22, J26, C68

Suggested Citation

Kudrna, George, The economy-wide effects of mandating private retirement incomes (March 24, 2022). Available at SSRN: https://ssrn.com/abstract=4065117 or http://dx.doi.org/10.2139/ssrn.4065117

George Kudrna (Contact Author)

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

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