"State pensions only substitute citizens’ individual savings.

Moreover, they undermine the self-

reliance and individual responsibility of citizens.”

The role of the pension system is to insurance against people’s poverty after their
working life. This can be done either through private (individual or private firms) or public
savings. In EU countries and is the UK State pensions play a big role in the pension system. It
can be argued that the reasons for this preference are paternalism and market failures in the
annuities market. We will mainly focus on the former.

The paternalistic view of State pensions justifies the need of public savings because it
believes that most people are not able to save enough for their retirement and so the State has to
intervene. The consequence of this intervention is a crowding-out of private savings and
depending on the proportional magnitude of the intervention relative to people’s earnings, it
could lead to a substitution effect.
This type of system can encourage excessive reliance on the system and can undermine
individual responsibility leading to increasing pressure on the state’s pension system. I agree on
this paternalistic view of the pension system because it comes from the realization that
individually it is harder to follow a responsible path and that it is easier to agree on a common
system and enforce it by collaborative contributions. On the other hand, the magnitude of
paternalism can vary depending on how much of elderly people’s consumption is the state
willing to insure.
We know that in general people tend to save because of diminishing marginal utility of
consumption and prefers consumption smoothing. Adding to this the fact that State pensions
are not enough to satisfy consumption needs/wishes of the elderly, it is clear that people’s
preference would not be to rely only on state pensions.
Moreover, in order to limit the crowding-out effect and to incentivize self-reliance, an optimal
social insurance system should partially, and not completely insure individuals against poverty
in the elderly age.

Private vs National Savings Gruber??