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Why mandate young borrowers to contribute to their retirement accounts?

  • Torben M. Andersen
  • Joydeep BhattacharyaEmail author
Research Article
  • 29 Downloads

Abstract

Many countries, in an effort to address the problem that many retirees have too little saved up, impose mandatory contributions into retirement accounts, that too, in an age-independent manner. This is puzzling because such funded pension schemes effectively mandate the young, the natural borrowers, to save for retirement. Further, present-biased agents disagree with the intent of such schemes and attempt to undo them by reducing their own saving or even borrowing against retirement wealth. We establish a welfare case for mandating the middle-aged and the young to contribute to their retirement accounts, even with age-independent contribution rates. We find, somewhat counterintuitively, that even though the young responds by borrowing more, that too at a rate higher than offered by pension savings, their lifetime utility increases.

Keywords

Mandated pensions Time inconsistency Social security Dynamic efficiency 

JEL Classification

H 55 D 91 D 03 E 6 

Notes

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Department of Economics and BusinessAarhus UniversityAarhus VDenmark
  2. 2.Department of EconomicsIowa State UniversityAmesUSA

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