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date: 23 August 2019

Abstract and Keywords

This article summarizes current economic analyses of occupational pension scheme design. The first section discusses the case of complete markets, and ‘spot’ labour markets, in which both employees and employers are indifferent between different occupational pension scheme designs. The implication of this result is that if any optimal scheme design exists then it must be the result of market incompleteness. The second section discusses the ways in which different types of market incompleteness faced by employees affect their relative preferences for pensions and cash wages. These include: uninsurable risks, such as wage risk and annuity price risk; portfolio restrictions; and the inability to borrow significantly against future income to support current consumption. In addition, workers receive significant tax benefits in the United States and the United Kingdom if they take part of their compensation in pensions. A third section discusses the empirical economic evidence about the role of pensions in labour markets that deviate from ‘spot’ labour markets.

Keywords: occupational pension scheme, pension design, labour markets, complete market, tax benefits, pension compensation

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