Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 178: The Dark Side of Wage Indexed Pensions
Evert Carlsson () and Karl Erlandzon ()
Additional contact information
Evert Carlsson: Centre for finance, School of Business, Economics and Law, Postal: Göteborg University, Box 640, SE 405 30 GÖTEBORG
Karl Erlandzon: Department of Economics, School of Business, Economics and Law, Postal: Göteborg University, Box 640, SE 405 30 GÖTEBORG
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% in annual consumption.
Keywords: Life-cycle; portfolio choice; pensions
44 pages, September 23, 2005
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