Universal pension scheme and risk-taking

Abstract

This article examines whether the existence of a universal pension scheme has any effect on a typical individual’s willingness to take risks at a young age. The pension system will give the individual who is assumed to live for two periods a fixed amount in the second period regardless of his initial choice between certain and uncertain income patterns. It is found that with a grant in place for everyone after retirement that satisfies the basic need of consumption in any part of life where the typical individual is more risk-averse, he will always accept the risky projects that at least make him indifferent between sure incomes and uncertain profits in the first period.

Keywords:

• universal pension scheme
• risk-taking

JEL Classification:

• D81
• D91
• H31

Acknowledgement

The author would like to thank the anonymous reviewers for their valuable comments. All remaining shortcomings are the author’s responsibility.

Notes

¹ One of the real-life examples of a universal pension system is Australia’s old age pension that provides income support to eligible older Australians.

² Without a doubt, a worker must still face the risk of unemployment and being fired. However, the risk of unemployment and being fired is minuscule, compared to the risk of an uncertain profit and bankruptcy facing an entrepreneur.