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Pension funding and individual accounts in economies with life-cyclers and myopes

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  • Hans Fehr

    ()
    (University of Würzburg)

  • Fabian Kindermann

    ()
    (University of Würzburg)

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 Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2009/23.

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Length: 41 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ieb:wpaper:2009/11/doc2009-23

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

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References

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Citations

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Cited by:
  1. Fedotenkov, I., 2012. "Pensions and ageing in a globalizing world. International spillover effects via trade and factor mobility," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-5590843, Tilburg University.
  2. Cremer, Helmuth & Pestieau, Pierre, 2011. "Myopia, redistribution and pensions," European Economic Review, Elsevier, Elsevier, vol. 55(2), pages 165-175, February.
  3. 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).
  4. Yu-Fu Chen & Michael Funke, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," CESifo Working Paper Series 2759, CESifo Group Munich.
  5. Kumru, Cagri S. & Thanopoulos, Athanasios C., 2011. "Social security reform with self-control preferences," Journal of Public Economics, Elsevier, Elsevier, vol. 95(7), pages 886-899.
  6. Fehr, Hans & Kallweit, Manuel & Kindermann, Fabian, 2013. "Should pensions be progressive?," European Economic Review, Elsevier, Elsevier, vol. 63(C), pages 94-116.
  7. Cagri Seda Kumru & Athanasios C. Thanopoulos, 2009. "Social Security Reform and Temptation," CESifo Working Paper Series 2778, CESifo Group Munich.
  8. 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.
  9. 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, Verein für Socialpolitik / German Economic Association 48708, Verein für Socialpolitik / German Economic Association.
  10. 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.
  11. 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).
  12. 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.
  13. 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.

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