Research

Working Papers

• Optimal Progressive Pension Systems and Heterogeneous Labor Market Risk

Abstract: Heterogeneity in job stability is a salient feature of the labor market, which is a well-documented fact by empirical research. Job stability is key for welfare of individuals as interrupted work histories and the consequent earnings losses reduce pension entitlements and impair workers’ ability to accumulate life-cycle savings. I study how a progressive pension system optimally considers heterogeneity in work histories and quantify welfare gains from implementing the optimal pension system. Pension progressivity provides insurance against the risk of interrupted work histories and mitigates lifetime earnings inequality caused by heterogeneity in job stability, but comes at the cost of distorting human capital investment and retirement decisions. Using a life-cycle model with heterogeneity in job stability, endogenous human capital accumulation, and retirement decision, I find that abolishing the Social Security cap and increasing pension progressivity relative to the current U.S. pension system is optimal. The optimal pension system leads to a welfare gain of 0.75% of lifetime consumption for labor market entrants. Following the observed macroeconomic shift in the job-stability distribution towards higher job stability since the 1990s, the optimal pension system becomes less progressive, but the welfare gain from implementing the optimal pension system remains sizeable. 

• Finalist for the European Central Bank Young Economist Prize 2022

• Best Paper Award at the RGS Doctoral Conference 2022