Compulsory Pensions

• Theoretical concept where the employee can’t opt out of having a pension scheme

• Default options are seen as a halfway house between no legislation on pensions and a full on compulsory pension.

• Australia is the only big economy to currently have such a system in place, but the introduction was more due to political reasons.

• Low level of retirement savings can be explained by high rates of time preferences, especially for younger people.

• A traditional approach to certain types of market failure is compulsion.

• “lock ins” are most likely to be regarded as very desirable by those who are prone to procrastination or time inconsistency.

• Such consumers may also resist compulsion given their preference over current consumption, over self-controlled mechanisms.

• may unwind the impact of compulsion by reducing voluntary savings or even worse by increasing debts.

• Research on this issue has given a really mixed response:

• over 40% of those who were already active pension members believed that “that all employees should be forced to contribute to a pension”

• But only 20% of those who were not currently contributing agreed to that statement.

• In another study, of those currently contributing to a pension, around 20% agreed strongly that “the government should make it compulsory to pay into a pension” and another 32% agreed slightly.

• Almost half however, disagreed.

• In addition to an even split of opinion on the matter, there appears to be other issues concerning a fully compulsory pension

• If compulsion is applied to a particular type of pension plan (such a RRSP) households, would inevitably substitute the compulsary component for other types of saving if they are undertaking some saving already.

• In welfare terms, this could lead to some households ending up worse off.

• Similarly, if the compulsory rate becomes a new benchmark for “adequate” savings, those who are contributing more may consider that they are saving too much, and so reduce their savings.

• Thus a full on compulsory pension scheme wouldn’t really work in the United Kingdom.