By Troebn M. Andersen and Joydeep Bhattacharya
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 counter-intuitively, that pitted against laissez faire, mandatory pensions succeed by incentivizing the young to borrow more and the middle-aged to save nothing on their own, in effect, rendering the latter’s present-biasedness inconsequential.
This paper challenges your intuition. The story is more complex than what the abstract can convey, so do read the paper to find how the twisted logic of cornering the middle-aged to save nothing on their own and making the young borrow like crazy ends up with the old being able to afford a comfortable retirement, even though everybody exhibits a bias for the present.