Disadvantaged Employees in the Trap of Defined Contribution Pension Plans

Ravit Rubinstein-Levi
International Journal of Economics and Business Administration, Volume IX, Issue 4, 55-76, 2021
DOI: 10.35808/ijeba/734


Purpose: The Defined Contribution (DC) saving method, which is implemented in most Organization for Economic Cooperation and Development (OECD) countries, is generally detrimental to disadvantaged employees. This paper proposes to improve the situation of disadvantaged employees by increasing government regulatory intervention, through an aggregation model. Design/Methodology/Approach: The study is conducted based on Israeli data and examines the impact of the aggregation model suggested in it, at the microeconomic level. Findings: Disadvantaged employees usually fail to accumulate sufficient pension savings and pay the highest management fees. Therefore, after retirement, their substitution ratio is low, and they suffer from poverty. Several population groups, such as immigrants, can be generally considered disadvantaged. The measures taken by governments to mitigate the problem do not succeed in bringing about a significant change. Practical Implications: The aggregation model presented in this paper offers a way to significantly improve the pension savings of disadvantaged employees. The model enables the implementation of compulsory pension law, thereby creates pension savings among all disadvantaged employees. In addition to that, the model enables to reduce the management fees paid by disadvantaged employees, and thus raise their future pension. Originality/Value: Given the similarity between Israel and other OECD countries in the context of pension savings, other countries may benefit from the research findings presented in this paper as well.

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