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

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Author Info
Hans Fehr ()

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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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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2724.

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

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

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Find related papers by JEL classification:
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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  52. Aleksandra Riedl & Silvia Rocha-Akis, 2009. "Testing the Tax Competition Theory: How Elastic are National Tax Bases in OECD Countries?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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