Department of Economics and Business Economics

Why mandate young borrowers to contribute to their retirement accounts?

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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.

Original languageEnglish
JournalEconomic Theory
Volume71
Issue1
Pages (from-to)115-149
Number of pages35
ISSN0938-2259
DOIs
Publication statusPublished - Mar 2021

    Research areas

  • Dynamic efficiency, Mandated pensions, Social security, Time inconsistency

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