Why Mandate Young Borrowers to Contribute to Their Retirement Accounts?

47 Pages Posted: 23 Aug 2017

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Joydeep Bhattacharya

Iowa State University - Department of Economics

Date Written: July 26, 2017

Abstract

Many countries, in an effort to address the problem that too 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, who wish to borrow, to save for retirement. Further, if agents are present-biased, they 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 life-time utility increases.

Keywords: present-biased preferences, mandatory pensions, pension offsets, crowding out

JEL Classification: H550, D910, D030, E600

Suggested Citation

Andersen, Torben M. and Bhattacharya, Joydeep, Why Mandate Young Borrowers to Contribute to Their Retirement Accounts? (July 26, 2017). CESifo Working Paper Series No. 6577, Available at SSRN: https://ssrn.com/abstract=3023223

Torben M. Andersen

University of Aarhus - Department of Economics ( email )

University Park
Building 322
DK-8000 Aarhus C
Denmark
+45 8 942 1609 (Phone)
+45 8 613 6334 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Joydeep Bhattacharya (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-5886 (Phone)
515-294-0221 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
41
Abstract Views
342
PlumX Metrics