Kathrin Schlafmann, Copenhagen Business School

Designing Pension Plans according to Consumption-Savings Theory

Abstract

We derive optimal characteristics of contribution rates into defined contribution pension plans based on consumption savings theory. Contribution rates should be age-dependent and adjust to the account balance-to-income ratio. Using detailed registry data on household savings behavior we show that individuals adjust savings according to these principles. We use these principles in a quantitative model to design optimal rules for contribution rates in a mandatory defined-contribution pension plan. Compared to typical rigid designs of contribution rates, our proposed design leads to the same average replacement rate and provides both liquidity and consumption benefits. The design implies a welfare gain of 3.3 percent in consumption equivalent relative to the current rigid design.

Kathrin Schlafmann is Assistant Professor at the Copenhagen Business School (Department of Finance), a Researcher at the Institute for International Economic Studies (IIES) in Stockholm, a Research Affiliate of the Centre for Economic Policy Research (CEPR) and a Research Fellow of the Danish Finance Institute (DFI).

She works in the area of Household Finance and Macroeconomics. Her research interest are Household Finance, Macroeconomics, Real Estate, Behavioral Economics.

You can read more about Kathrin Schlafmann here

CEBI contact person: Patrick Moran