The Design and Welfare Implications of Mandatory Pension Plans

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Abstract

In a rich, calibrated life-cycle model, we show that well-designed mandatory pension plans significantly improve the welfare of individuals procrastinating on savings, and even improve most rational individuals’ welfare through a return tax advantage and fair annuitization. For a group of heterogeneous savers, in terms of preferences and sophistication, the best plan has contributions of 10% of income from age 30, a glidepath investment strategy, payouts following a variable lifelong annuity, and options to choose a different investment strategy and to modify the annuitization feature. This plan generates an average welfare gain of $175,000 per individual.
Original languageEnglish
JournalJournal of Financial and Quantitative Analysis
Volume58
Issue number8
Pages (from-to)3420-3449
Number of pages30
ISSN0022-1090
DOIs
Publication statusPublished - Dec 2023

Bibliographical note

Published online: 22 June 2022.

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