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Why mandate young borrowers to contribute to their retirement accounts?

Torben M. Andersen () and Joydeep Bhattacharya ()
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Torben M. Andersen: Aarhus University

Economic Theory, 2021, vol. 71, issue 1, No 4, 115-149

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: D E H (search for similar items in EconPapers)
Date: 2021
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Working Paper: Why mandate young borrowers to contribute to their retirement accounts? (2021) Downloads
Working Paper: Why Mandate Young Borrowers to Contribute to their Retirement Accounts? (2017) Downloads
Working Paper: Why mandate young borrowers to contribute to their retirement accounts? (2016) Downloads
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DOI: 10.1007/s00199-019-01235-2

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