George Kudrna
Abstract: This paper investigates the economy-wide effects of mandating private pensions. Drawing on Australia’s Superannuation Guarantee (SG) legislation, which mandates contributions to private retirement (superannuation) accounts, our objective is to quantify the long-term effects of the SG mandate on households’ economic decisions, welfare, and macroeconomic and fiscal indicators. We begin with the partial equilibrium (PE) life-cycle analysis that considers private (liquid) and superannuation (illiquid) assets, highlighting the interactions of the SG mandate with income taxation, public pensions, and bequest re- distribution. We then develop a general equilibrium (GE) model that includes overlapping generations of heterogenous households, labor income and survival risks, and both types of household assets. The model is calibrated using Australian data and incorporates a detailed representation of government policy, including mandatory superannuation. The simulation results indicate that higher SG rates lead to significantly greater household wealth, output and consumption per capita, and household welfare across the skill distribution in the long run. These positive effects are due to (combination of) increased tax subsidies, more binding means testing reducing public pensions, redistribution of increased accidental bequests and also GE effects on factor prices (with higher gross wage rates).
Keywords: Private Pension, Social Security, Income Taxation, Labor Supply, Life- Cycle, General Equilibrium
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