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The Design and Welfare Implications of Mandatory Pension Plans

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  • Larsen, Linda S.
  • Munk, Claus

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 $175,000 per individual.

Suggested Citation

  • Larsen, Linda S. & Munk, Claus, 2023. "The Design and Welfare Implications of Mandatory Pension Plans," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 58(8), pages 3420-3449, December.
    • Handle: RePEc:cup:jfinqa:v:58:y:2023:i:8:p:3420-3449_7
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