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Retirement Pensions (Reasons for Government Intervention (Individual…
Retirement Pensions
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Non-Optimality
Under-saving
If people have been saving optimally, then an expansion of the pension system should not affect people's consumption upon retirement.
- However, we see huge (negative) correlation between expansion of the pension system and poverty
- Thus, there must be people who were trapped in poverty because of their inability to save optimally
Empirically, majority of the people tend to under-save (and are passive savers).
Crowding Out
Social security may crowd out private savings (i.e. people take advantage of social security and do not save as much as before).
Empirically, almost no crowding out due to passivity.
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Impact on labour supply
How do we balance the benefits of consumption smoothing with the moral hazard cost of social security?
- By making contributions, we not only smooth consumption, but we also lower the returns of working today
- This then reduces labour supply
- How do we balance the benefits with the costs?
Empirically, there is a reduction of labour supply in response to social security (e.g. more 65+ year-olds are retiring with an increase in social security). However, we note that the overall elasticity of labour supply is not so big, that it provides a big cost of providing these pension systems.
- Order of magnitude, in terms of reduction of labour supply, is not extremely large.