DP14650 Pareto-improving transition to fully funded pensions under myopia

Author(s): Torben M Andersen, Joydeep Bhattacharya, Marias H Gestsson
Publication Date: April 2020
Keyword(s): mandatory pensions, Pareto criterion pension crowding out, Present-Biased Preferences, transition
JEL(s): D3, D91, E6, H55
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14650

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.