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Pareto-improving transition to fully funded pensions under myopia

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  • Andersen, Torben M
  • Bhattacharya, Joydeep
  • Gestsson, Marias H

Abstract

Under dynamic efficiency, a pay-as-you-go (PAYG) pension scheme helps the current generation of retirees but hurts future generations because they are forced to save via a return-dominated scheme. Abandoning it is deemed welfare-improving but typically not for all generations. But what if agents are present-biased (hence, undersave for retirement) and the "paternalistically motivated forced savings" component of a PAYG scheme motivated its existence in the first place? This paper shows it is possible to transition from such a PAYG scheme on to a higher return, mandated fully-funded scheme; yet, no generation is hurt in the process. The results inform the debate on policy design of pension systems as more and more policy makers push for the transition to take place but are forced to recognize that current retirees may get hurt along the way.

Suggested Citation

  • Andersen, Torben M & Bhattacharya, Joydeep & Gestsson, Marias H, 2020. "Pareto-improving transition to fully funded pensions under myopia," CEPR Discussion Papers 14650, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14650
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    Cited by:

    1. Gustafsson, Johan, 2021. "Public Pension Reform and the Equity-Efficiency Trade-off," Umeå Economic Studies 992, Umeå University, Department of Economics.

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    More about this item

    Keywords

    mandatory pensions; Pareto criterion pension crowding out; Present-Biased Preferences; transition;
    All these keywords.

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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