Answer to Question #291986 in Microeconomics for Ahtesham

Question

6.

The pension system provides income for people when

they retire. Recipients with more income from other

sources receive smaller benefits (after taxes) than recipi-

ents with less income from other sources.

a. How does the provision of pensions affect people's

incentive to save while working?

Answer 1

Pension reduces the incentive to save while working because they believe that the pension scheme saves for their future. It all starts from behavioral mindset once one believes that his/her salary reduces as a result to reduction of pension towards retirement planning. On the other, real economists believe the pension reduces their income and therefore they should save more to make their life better. This pushes them to look for more income to increase their disposable income and thus their savings. The people with more income therefore tend to save more and look for more incomes since their pension is higher and thus their take home pay is less comparatively.