The Adverse and Beneficial effects of Front-Loaded Pension Contributions

In funded defined benefit pension schemes, contribution and accrual rates are typically age-independent. This implies that pension contributions are front-loaded. As contributions and accruals usually relate to earned labour income, this front-loading may a↵ect labour market eciency. For it implies that the labour supply of younger workers is implicitly taxed and that of older workers implicitly subsidized. This paper shows that front-loading of pension contributions may be welfare-reducing. It also shows that the welfare loss is weakened if one accounts for government spending that is financed with a labour income tax. In this case, front-loading may even be welfare-increasing. In particular, the more elastic is the labour supply of older workers relative to that of younger workers, the more likely it is that front-loading produces a welfare gain.