The Impact of Compulsory Retirement Savings Contributions on Lifetime Welfare

In private pre-funded retirement savings systems, workers can be compelled by regulation to make minimum contributions to retirement accounts. We examine the impact of compulsory contributions into retirement savings (superannuation) accounts on individuals' lifetime consumption and wealth using a continuous-time life-cycle model calibrated to the Household, Income and Labour Dynamic in Australia (HILDA) survey data. Simulations of optimal paths from the calibrated model show that the consumption of lower wealth individuals is severely constrained by compulsory savings, resulting in a sizeable welfare loss. In response, we propose a time varying contribution rate that mitigates the welfare loss while enhancing retirement wealth