The Dark Side of Wage Indexed Pensions

Evert Carlsson () and Karl Erlandzon ()
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Evert Carlsson: Centre for finance, School of Business, Economics and Law, Postal: Göteborg University, Box 640, SE 405 30 GÖTEBORG
Karl Erlandzon: Department of Economics, School of Business, Economics and Law, Postal: Göteborg University, Box 640, SE 405 30 GÖTEBORG

No 178, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: This paper investigates some welfare effects of forced saving through a mandatory pension scheme. The framework for the analysis is a life-cycle model of a borrowing constrained individual´s consumption and portfolio choice in the presence of uncertain labour income and realistically calibrated tax and pension systems. Pension benefits stem from both a defined benefit and a notionally defined contribution part, the latter being indexed to stochastic aggregate labour income. We show that agents attribute little value to their pension savings in early life. Furthermore, we estimate the welfare loss for individuals in mid-life associated with the dependency between pension returns and labour income growth to 1.2% in annual consumption.

Keywords: Life-cycle; portfolio choice; pensions (search for similar items in EconPapers)
JEL-codes: D91 G11 G23 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2005-09-23
New Economics Papers: this item is included in nep-bec and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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