Work

Designing Pension Plans According to Consumption-Savings Theory

Year: 2024

Type: article

Abstract: We derive optimal characteristics of contribution rates into defined contribution pension plans based on consumption-savings theory. Contribution rates should increase with age and decrease with the balance-to-income ratio. Using Swedish registry data, we show that on average, individuals save according to those principles. However, almost half of the population behaves hand-to-mouth and does not undo the mandated constant contribution rates. In a quantitative model, designing contribution rates to follow the principles implies a 1.8% welfare gain and less dispersed replacement rates, while maintaining the same average replacement rate. Results are robust to various sources of model misspecification, including temptation preferences.

Source: Review of Financial Studies

DOI: 10.1093/rfs/hhae061

Authors: Kathrin Schlafmann, Ofer Setty, Roine Vestman

Institutions: Copenhagen Business School, Tel Aviv University, Stockholm University

Language: English

Topic: Financial Literacy, Pension, Retirement Analysis

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W4403786011

FWCI: 4.06

Cites: 45

Cited by: 5

Related to: 10