Maintaining Incomes after Work: Do Compulsory Earnings-Related Pensions Make Sense?

Most of the recent debate about pension reform has focused on the extent to which benefits should be provided publicly, through earnings-related social insurance, or privately, via compulsory saving. Little attention has been paid to the more important issue of whether there is a rationale for any form of compulsory earnings-related pension provision. This article examines three main rationales for this form of pensioning: moral hazard, myopia/paternalism, and willingness to pay. It concludes that, though the last of these may provide a political explanation for why earnings-related social-insurance schemes were first introduced, it is difficult to find an economic rationale for why such provision should be continued. Nor are there convincing arguments for replacing earnings-related social insurance with compulsory saving. Hence, the pension reform debate should focus less on the way schemes are financed and more on the most appropriate shape for compulsory pension benefits. Copyright 2000 by Oxford University Press.