New article "Ignorance is bliss: Should a pension reform be announced?"

New article "Ignorance is bliss: Should a pension reform be announced?" by Igor Fedotenkov in Economics Letters.

Highlights

• Agents’ response to the announced pension reform may be harmful to themselves.
• Lower expected pensions reduce consumption when young.
• They also lead to lower interest rates, and reduce future consumption.
• Expectations of the reform reduce welfare in the first transitional generation.
• Younger generations, however, are better off if pension reform is announced.

Abstract
This paper studies whether a pension reform, namely a switch from a pay-as-you-go (PAYG) to a more-funded scheme should be announced. We show that such an announcement increases savings, leading to a decline in interest rates. Smaller returns to savings lead to higher losses for the first transitional generation, which suffers from the reform the most. On the other hand, higher savings by the first transitional generation lead to faster capital accumulation, which benefits younger generations. We argue that if a government cares about the agents with the most to lose, it may more beneficial not to announce such a reform.


Fedotenkov, I. (2016). Ignorance is bliss: Should a pension reform be announced? Economics Letters, 147, 135–137. http://doi.org/10.1016/j.econlet.2016.08.029