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IAI Actuarial Core Principles · Business Economics · Government intervention in a market

A government states that it will mandate pension contributions for all employees, arguing that many people would otherwise undersave for retirement. Which rationale is most directly being used?

The rationale is that pension saving is a merit good: individuals are short-sighted or poorly informed and undervalue future needs, so they undersave. Compulsory contributions correct this imperfect information and myopia, rather than addressing externalities, public goods or monopoly power.

  1. ACorrecting a negative externality from production
  2. BTreating pensions as a public good
  3. CAddressing myopia and imperfect information, treating pension saving as a merit goodCorrect
  4. DBreaking up a monopoly in pension provision
  5. Reducing the budget deficit through lower taxation

Explanation

Undersaving reflects short-sightedness and poor information about future needs. Treating pension saving as a merit good justifies compulsion. Pensions are excludable and rivalrous, so they are not public goods, and no production externality is involved.

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