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Pension Funding and Individual Accounts in Economies with Life-cyclers and Myopes

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  • Hans Fehr
  • Fabian Kindermann

Abstract

The present paper studies the growth and efficiency consequences of pension funding with individual retirement accounts in a general equilibrium overlapping generations model with idiosyncratic lifespan and labor income uncertainty. We distinguish between economies with rational and hyperbolic consumers and compare the consequences of voluntary and mandatory retirement plans. Three major findings are derived in our study: First, we quantify the commitment effect of social security for myopic individuals by roughly 1 percent of aggregate resources. It is possible to recapture this commitment technology in IRAs, if those are annuitized. Second, despite the fact that our consumers have an operative bequest motive, the welfare gain from the (implicit) longevity insurance of the pension system is significant and amounts to roughly 0.5 percent of aggregate resources. However, mandatory annuitization reduces unintended bequests so that future generations are significantly hurt. Finally, our results highlight the importance of liquidity effects for social security analysis. These efficiency gains are only attainable if accounts are voluntary and not mandatory.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2724.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2724

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Keywords: individual retirement accounts; annuities; stochastic general equilibrium; hyperbolic consumers;

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Cited by:
  1. Marcin Bielecki & Karolina Goraus & Jan Hagemejer & Krzysztof Makraski & Joanna Tyrowicz, 2014. "Small assumptions (can) have a large bearing: evaluating pension system reforms with OLG models," Working Papers, Faculty of Economic Sciences, University of Warsaw 2014-20, Faculty of Economic Sciences, University of Warsaw.
  2. Fedotenkov, I., 2012. "Pensions and ageing in a globalizing world. International spillover effects via trade and factor mobility," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5590843, Tilburg University.
  3. Michael Funke & Yu-Fu Chen, 2010. "Booms, recessions and financial turmoil: A fresh look at investment decisions under cyclical uncertainty," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21007, Hamburg University, Department of Economics.
  4. Cagri S. Kumru & Athanasios C. Thanopoulos, 2010. "Social Security Reform with Self-Control Preferences," Discussion Papers, School of Economics, The University of New South Wales 2010-11, School of Economics, The University of New South Wales.
  5. Fehr, Hans & Kallweit, Manuel & Kindermann, Fabian, 2013. "Should pensions be progressive?," European Economic Review, Elsevier, Elsevier, vol. 63(C), pages 94-116.
  6. Andras Simonovits, 2013. "A family of simple paternalistic transfer models," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 1324, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  7. Kallweit, Manuel & Fehr, Hans & Kindermann, Fabian, 2011. "Should pensions be progressive? Yes, at least in Germany!," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48708, Verein für Socialpolitik / German Economic Association.
  8. Chen, Yu-Fu & Funke, Michael, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2009-31, Scottish Institute for Research in Economics (SIRE).
  9. Van de Ven, Justin, 2011. "Do Defined Contribution Pensions Correct for Short-Sighted Savings Decisions? Evidence from the UK," Papers, Economic and Social Research Institute (ESRI) WP399, Economic and Social Research Institute (ESRI).
  10. CREMER, Helmuth & PESTIEAU, Pierre, . "Myopia, redistribution and pensions," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2269, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Cagri Seda Kumru & Athanasios C. Thanopoulos, 2009. "Social Security Reform and Temptation," CESifo Working Paper Series 2778, CESifo Group Munich.
  12. Hans Fehr, 2009. "Computable Stochastic Equilibrium Models and Their Use in Pension- and Ageing Research," De Economist, Springer, Springer, vol. 157(4), pages 359-416, December.
  13. Jan Hagemejer & Krzysztof Makarski & Joanna Tyrowicz, 2013. "Efficiency of the pension reform: the welfare effects of various fiscal closures," Working Papers, Faculty of Economic Sciences, University of Warsaw 2013-23, Faculty of Economic Sciences, University of Warsaw.

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