Implications of Pension Illiteracy for Labor Supply and Redistribution

Johan Gustafsson ()
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Johan Gustafsson: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden, https://www.umu.se/handelshogskolan

No 993, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: This paper explores the effects of pension illiteracy on aggregate labor supply and the redistributive performance of public pension systems. I consider an overlapping generations model in continuous time populated with individuals who differ in labor productivity and pension literacy. Agents suffering from pension illiteracy fail to fully account for the structure of the pension system when planning their economic behavior over the life cycle. In particular, I assume that myopic agents treat changes to replacement income as exogenous in the active-retired trade-off and contributions to the pension system as a pure labor income tax. I find that pension illiteracy can negatively impact aggregate labor supply and increase earnings inequality and lifetime income inequality. This suggests that pension illiteracy may limit the efficiency gains of increasing the correlation between individual contributions and benefits, making the equity-efficiency trade-off difficult to characterize in the context of pension reforms.

Keywords: Labor supply; Myopia; Public pension (search for similar items in EconPapers)
JEL-codes: H55 J22 J26 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2021-06-29
New Economics Papers: this item is included in nep-age, nep-dge and nep-lma
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