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

  • Hans Fehr
  • Fabian Kindermann

The present article studies the growth and efficiency consequences of pension funding with individual retirement accounts (IRAs) 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% 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% 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. (JEL codes: H55, J26) Copyright The Author 2010. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/cesifo/ifq005
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Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 56 (2010)
Issue (Month): 3 (September)
Pages: 404-443

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Handle: RePEc:oup:cesifo:v:56:y:2010:i:3:p:404-443
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