A Default Solution to Pension Problems

I mentioned before that John McHale wrote a paper a few years summarising the behavioural economics solutions to pension underfunding.
McHale Article

The literature has progressed a lot even since then. The IFS in London are holding an event on June 15th to discuss, among other things, mass “opt-out” pension schemes being rolled out over the next five years in the UK where having a pension is the default position for new employees rather than not having a pension. Such pensions are designed based on simple psychological insights about how people make future decisions, the insights being mostly that we overweight current pain and have a tendency to procrastinate. This sounds pretty simple but incorporating these insights does make a big difference to policy design.

This literature is the most advanced, in my view, application of behavioural economics to real-world policy problems and it will be very interesting to see how this evolves. A link to their report is also available on the link below. I have constructed reading lists and so on for students and they are available below. They might be useful if people are interested in the general area of applying behavioural economics to policy.

Link to IFS


Writing off a generation? – Blanchflower

Snippets of Blanchflower’s newsnight interview are available below. He is quite adamant that omitting graduate unemployment from the policy response is a big mistake. He is talking about the UK but it may not have escaped the notice of readers of the blog finishing exams that things are tight here also.


I posted previously on his paper with Bell which offers some solutions to young unemployment.

Unemployment and Homeownership

Ronan Lyons updates his ongoing discussion of this issue on the following link

As Ronan states himself, these are round numbers being constructed from extrapolations from the Census and various property data sites. Ronan is moving toward estimates of the number of people who are both unemployed and in negative equity. I will make his life more difficult by noting that while this would be a really interesting statistic (particular its regional distribution), it does not take into account people who have retained some form of employment but whose income has fallen substantially.

Boston Fed Paper on Foreclosures

A recent Boston Fed working paper examines the rationale for government intervention to subsidise mortgage mitigation. The paper is sceptical about the benefits of this approach and they conclude the following:

An important implication of our analysis is that policies designed to reduce foreclosures should focus on ameliorating the immediate effects of job loss and other adverse life events, rather than modifying loans to make them more “affordable” on a long-term basis”.


I would respectfully call on our own Central Bank to start producing and publishing this type of research and my apologies to them if they already have and I am not aware of it. I am basing my belief that this research is not in circulation from looking in detail at the publications section of the Central Bank website. In general, I cannot find any good publications written in the Irish context on the implications of falling house prices on household financial positions and the policy issues associated with this. These policy issues are clearly different in Ireland than in the United States due to very different legal methods for dealing with mortgage default. We need a document though that spells out the different options available if a sizeable proportion of mortgage holders in areas where values have plummeted (and may never recover) start being unable to make their repayments. I am aware that all sorts of arrangements are currently being used in individual cases but this is hardly a substitute for a fully outlined statement of policy options that could be debated on forums like this and by smaller groups of experts.

To date, Ronan Lyon’s two blog posts seem to be the most sophisticated data analyses of negative equity and related issues in the Irish context. I cannot see how the monetary economists working in Ireland can claim to have a full grasp of the current situation without an understanding of these micro-features. I have absolutely no axe to grind here and I look forward to being shown the error of my ways.

Central Bank Publications Page

Irish Economy on Marginal Revolution

Tyler Cowen gives a brief summary of his opinion on where things went wrong