The Welfare and Labor Market Effects of Mandatory Pension Savings: Evidence from the Israeli Case
By Adi Brender
Many studies show that workers make poor decisions about pension savings. Policy responses to these failures include social security retirement arrangements, tax benefits for pension savings and, in some countries, also mandatory private savings towards retirement. This study examines the response of Israeli employees to the introduction of mandatory pension contributions, and the medium-term labor market effects of the arrangement, using a randomly selected panel of 300,000 employees. The first year of the arrangement, when enforcement was lax and compliance partial, provides an opportunity to identify employee preferences, before compliance became almost universal. We find that in this year both the probability of beginning to save and the tendency to contribute at rates above the required minimum were positively correlated with how (un)beneficial the required pension savings were for the employee. We also show that 5 years after the arrangement was initiated wages of its target population were reduced by nearly the full amount of the increase in employers’ contributions. These outcomes indicate a rational and informed response of the employees and that such arrangements require careful and detailed examination of their consequences for the affected population.
Source: SSRN
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