Pension reform and individual retirement accounts

Abstract

This paper employs a life-cycle model with exogenous stochastic labor income to analyze how different types of individual retirement accounts affect households’ savings and portfolio allocation as well as welfare. We consider voluntary accounts as opposed to mandatory accounts that require a minimum contribution rate. Moreover, we contrast add-on accounts with carve-out accounts that replace part of the public social security system. Quantitative results suggest that public retirement systems with mandatory add-on accounts have adverse welfare effects particularly for the young and poor while carve-out accounts are likely to generate welfare gains. In contrast to the previous literature, we find that default portfolio rules have limited welfare consequences.