Why mandate young borrowers to contribute to their retirement accounts?

Date
2016-09-26
Authors
Andersen, Torben
Bhattacharya, Joydeep
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Economics
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Abstract

Many countries, in an effort to address the problem that too many retirees have too little saved up, impose mandatory contributions into retirement accounts, that too, in an age-independent manner. This is puzzling because such funded pension schemes effectively mandate the young, who wish to borrow, to save for retirement. Further, if agents are present-biased, they disagree with the intent of such schemes and attempt to undo them by reducing their own saving or even borrowing against retirement wealth. We establish a welfare case for mandating the middle-aged and the young to contribute to their retirement accounts, even with age-independent contribution rates. We find, somewhat counter-intuitively, that pitted against laissez faire, mandatory pensions succeed by incentivizing the young to borrow more and the middle-aged to save nothing on their own, in effect, rendering the latter's present-biasedness inconsequential.

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present-biased preferences, mandatory pensions, pension o¤sets, crowding out
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