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Why mandate young borrowers to contribute to their retirement accounts?

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  • Andersen, Torben M.
  • Bhattacharya, Joydeep

Abstract

Many countries, in an effort to address the problem that too many retirees have too little saved up, impose mandatory contributions into retirement accounts, that too, in an age-independent manner. This is puzzling because such funded pension schemes effectively mandate the young, who wish to borrow, to save for retirement. Further, if agents are present-biased, they disagree with the intent of such schemes and attempt to undo them by reducing their own saving or even borrowing against retirement wealth. We establish a welfare case for mandating the middle-aged and the young to contribute to their retirement accounts, even with age-independent contribution rates. We find, somewhat counter-intuitively, that pitted against laissez faire, mandatory pensions succeed by incentivizing the young to borrow more and the middle-aged to save nothing on their own, in effect, rendering the latter's present-biasedness inconsequential.

Suggested Citation

  • Andersen, Torben M. & Bhattacharya, Joydeep, 2016. "Why mandate young borrowers to contribute to their retirement accounts?," ISU General Staff Papers 201609260700001016, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genstf:201609260700001016
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    File URL: http://lib.dr.iastate.edu/cgi/viewcontent.cgi?article=1016&context=econ_workingpapers
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Why mandate young borrowers to contribute to their retirement accounts?
      by Christian Zimmermann in NEP-DGE blog on 2017-02-22 03:27:57

    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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