Working Paper: CEPR ID: DP14650
Authors: Torben M. Andersen; Joydeep Bhattacharya; Marias H. Gestsson
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.
Keywords: present-biased preferences; mandatory pensions; transition; Pareto criterion; pension crowding out
JEL Codes: H55; D91; D3; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Transition from PAYG pension scheme to mandated FF scheme (H55) | No generation is harmed (H60) |
| Present bias (D15) | Insufficient savings for retirement (D14) |
| Initial young generation mandated to contribute to FF scheme while receiving PAYG benefits (H55) | Welfare improves relative to continuing PAYG scheme (H55) |
| Higher returns of the FF scheme (G17) | Offset potential losses from reduced PAYG benefits (H55) |