Four Pension Models with Two Types

Abstract

This chapter presents four pension models with two types: type L earns much less than type H and discounts the future much stronger. Section 4.2 introduces proportional (earnings-related) pensions, where the benefits are proportional to wages. Here, the socially optimal contribution rate is a decreasing function of the annual interest rate but even for very high (10% annual) interest rates, the contribution rate stays above 20%. Section 4.3 discusses means-tested pensions, where the better-paid and farsighted worker does not receive any pension. Section 4.4 reduces the burden of type H by introducing a cap on the pension contribution base. Section 4.5 adds voluntary pensions with matching, and its tax expenditure reduces their utility.