Pareto-improving transition to fully funded pensions under myopia. (June 2021)

• Record Type: Journal Article
• Authors: Andersen, Torben M.; Bhattacharya, Joydeep; Gestsson, Marias H.
• Is Part Of: Journal of demographic economics. Volume 87:Number 2(2021)
• Page Start: 169
• Page End: 212
• Publication Date: 2021-06
• Subjects: Crowding out, -- mandatory pensions, -- Pareto criterion, -- present bias, -- transition; H55, -- D91, -- D03, -- E6; Demography -- Economic aspects -- Periodicals; Population -- Economic aspects -- Periodicals; 304.605
• DOI: 10.1017/dem.2020.13
• Languages: English
• ISSNs: 2054-0892

Abstract

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.