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The Design and Welfare Implications of Mandatory Pension Plans

Published online by Cambridge University Press:  16 January 2023

Linda S. Larsen  and
Claus Munk Open the ORCID record for Claus Munk [Opens in a new window]
Linda S. Larsen
Affiliation:
Copenhagen Business School Department of Finance, Pension Research Centre (PeRCent), and Danish Finance Institute lsl.fi@cbs.dk
Claus Munk*
Affiliation:
Copenhagen Business School Department of Finance, Pension Research Centre (PeRCent), and Danish Finance Institute
*
cm.fi@cbs.dk (corresponding author)
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Abstract

In a rich, calibrated life-cycle model, we show that well-designed mandatory pension plans significantly improve the welfare of individuals procrastinating on savings, and even improve most rational individuals’ welfare through a return tax advantage and fair annuitization. For a group of heterogeneous savers, in terms of preferences and sophistication, the best plan has contributions of 10% of income from age 30, a glidepath investment strategy, payouts following a variable lifelong annuity, and options to choose a different investment strategy and to modify the annuitization feature. This plan generates an average welfare gain of $175,000 per individual.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 8 , December 2023 , pp. 3420 - 3449
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We appreciate comments and suggestions from an anonymous referee, Marcel Fischer, Thierry Foucault (the editor), Bjarne Astrup Jensen, Bruno Kamden, Matti Keloharju, David Laibson, Ellen McGrattan, Alexander Michaelides, Lasse Heje Pedersen, Jesper Rangvid, and Roine Vestman, and participants at presentations at the 2019 PeRCent Conference in Copenhagen, the City University of Hong Kong, Aalto University Helsinki, the Danish Society of Actuaries, Lund University, the 2020 FMA Virtual Conference, and the European University Institute and Banco de España’s 2021 Conference on Social Security Reforms. We gratefully acknowledge support from the Danish Finance Institute (DFI) and from PeRCent, which receives base funding from the Danish pension funds and Copenhagen Business School.

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