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The Dark Side of Wage Indexed Pensions

Report
Authors Evert Carlsson
Karl Erlandzon
Place of publication Göteborg
Publication year 2005
Published at Department of Economics
Language en
Links hdl.handle.net/2077/2856
Keywords Life-cycle; portfolio choice; pensions
Subject categories Economics

Abstract

This paper investigates some welfare effects of forced saving through a mandatory pension scheme. The framework for the analysis is a life-cycle model of a borrowing constrained individual´s consumption and portfolio choice in the presence of uncertain labour income and realistically calibrated tax and pension systems. Pension benefits stem from both a defined benefit and a notionally defined contribution part, the latter being indexed to stochastic aggregate labour income. We show that agents attribute little value to their pension savings in early life. Furthermore, we estimate the welfare loss for individuals in mid-life associated with the dependency between pension returns and labour income growth to 1.2 0n annual consumption.

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