Bankruptcy Exemptions, Borrowing Constraints, and Old-Age Pensions

Torben M Andersen, Joydeep Bhattacharya and Min Wang

No 19779, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In most economies, pension benefits are shielded from garnishment in the event of loan default. This paper argues that without such protection, pension programs fail to meet their primary goal of securing adequate retirement living standards. We examine an incomplete-markets, dynamically efficient economy where young borrowers face endogenous borrowing limits due to an inability to commit to repayment in middle age. By incorporating varying degrees of bankruptcy exemptions---specifically the protection of pension benefits---we demonstrate that pension policies effectively increase retirement consumption only when pension benefits receive some level of protection. In contrast, under exogenously set borrowing constraints, such policies enhance retirement living standards only when borrowing is restricted entirely.

Date: 2024-12
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