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Public pension reform with ill-informed individuals

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  • Gustafsson, Johan

Abstract

Several studies find that most individuals do not understand how public pension systems function. The present paper explores how this pension illiteracy affects the outcomes of public pension reform in terms of income inequality and total labor supply. For this purpose, I introduce an overlapping generations model with endogenous savings, labor supply, and retirement. Calibrating the model to an average OECD economy, I find that a reform that increases the earnings-dependence of pension systems can reduce both lifetime inequality and labor market participation if individuals fail to account for the contribution–benefit formula in their economic decision-making. These results contrast with the conventional equity–efficiency trade-off predicted by a model populated only with rational individuals.

Suggested Citation

  • Gustafsson, Johan, 2023. "Public pension reform with ill-informed individuals," Economic Modelling, Elsevier, vol. 121(C).
    • Handle: RePEc:eee:ecmode:v:121:y:2023:i:c:s0264999323000317
    DOI: 10.1016/j.econmod.2023.106219
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    2. Linden, Mikael, 2023. "Retirement Age Trap: RDD Approach to Terminated Retirement Spells," MPRA Paper 119168, University Library of Munich, Germany.

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    More about this item

    Keywords

    Labor supply; Financial illiteracy; Public pension;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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