The Commitment Value of Prefunded Pensions

Jean-Denis Garon

No 5658, CESifo Working Paper Series from CESifo

Abstract: This paper studies how prefunding public pensions can improve policy outcomes when short-sighted governments cannot commit. We focus on sustainable plans, where optimal nonlinear pensions are not reneged on by sequential governments. Prefunding pensions is a commitment mechanism. It implies lower contributions than does the second best policy, which reduces temptation to over-redistribute later and to misuse revealed private information. Prefunding may be preferable even if the population growth rate is higher than the rate of return on assets. Second best optimal policies are also more likely to be renegotiation proof under prefunding.

Keywords: pensions; commitment; redistribution; prefunding (search for similar items in EconPapers)
JEL-codes: H31 H55 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_5658

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