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Pareto-improving transition to fully funded pensions under myopia

Pareto-improving transition to fully funded pensions under myopia

Title: Pareto-improving transition to fully funded pensions under myopia
Author: Andersen, Torben M.
Bhattacharya, Joydeep
Gestsson, Marías Halldór
Date: 2021-03-02
Language: English
Scope: 44
University/Institute: University of Iceland
Series: Journal of Demographic Economics; 87(2)
ISSN: 2054-0892
DOI: 10.1017/dem.2020.13
Subject: Lífeyrissparnaður; Crowding out; mandatory pensions; Pareto criterion; present bias; transition; Demography; Geography, Planning and Development; Economics and Econometrics
URI: https://hdl.handle.net/20.500.11815/2711

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Andersen , T M , Bhattacharya , J & Gestsson , M H 2021 , ' Pareto-improving transition to fully funded pensions under myopia ' , Journal of Demographic Economics , vol. 87 , no. 2 , pp. 169-212 . https://doi.org/10.1017/dem.2020.13


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.


Funding Information: Acknowledgements. We thank three anonymous referees and the editor, David de la Croix, for their encouragement and constructive input. We also acknowledge financial support from the Danish Council for Independent Research (Social Sciences) under the Danish Ministry of Science, Technology and Innovation. Publisher Copyright: Copyright © Université catholique de Louvain 2021.

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