Time inconsistency and retirement planning

We quantify the welfare gains from better retirement planning using a model in which retirement planning is time inconsistent. A modest increase in a household’s planning horizon by just a few years generates large aggregate and individual welfare gains.     

Voting over type and generosity of a pension system when some individuals are myopic

This paper studies the determination through majority voting of a pension scheme when society consists of far-sighted and myopic individuals. All individuals have the same basic preferences but myopics tend to adopt a short-term view (instant gratification) when dealing with retirement saving and labor supply. Consequently, they will find themselves with low consumption after retirement and regret their insufficient savings decisions. Henceforth, when voting they tend to commit themselves into forced saving. We consider a pension scheme that is characterized by two parameters: the payroll tax rate (that determines the size or generosity of the system) and the “Bismarckian factor” that determines its redistributiveness. Individuals vote sequentially. We examine how the introduction of myopic agents affects the generosity and the redistributiveness of the pension system. Our main result is that a flat pension system is always chosen when all individuals are of one kind (all far-sighted or all myopic), while a less redistributive system may be chosen if society is composed of both myopic and far-sighted agents. Furthermore, while myopic individuals tend to prefer larger payroll taxes than their far-sighted counterparts, the generosity of the system does not always increase with the proportion of myopics.     

The choice between an annuity and a lump sum: Results from Swiss pension funds

This paper uses unique micro data from Swiss employer-based pension plans to study the annuitization decision at retirement. The administrative nature of our data, though limited with respect to individual background characteristics, allows us to analyze real choices over large retirement balances, rather than subjectively reported intentions to annuitize. We find a strong and robust impact of a utility-based measure of the annuity's value (computed within a life-cycle framework) on individual annuitization rates. Low accumulation of retirement assets is strongly associated with the choice of the lump sum, presumably due to the availability of means-tested social assistance. The sponsor's default option, in most cases the annuity, is also found to be highly influential in the decision to annuitize.     

When are voluntary pensions indifferent?

The mandatory pension pillar is usually supplemented by a voluntary one. In our simple model, voluntary pensions partly replace mandatory ones without affecting the outcomes: the voluntary pensions are indifferent. This result may serve as benchmark.     

The effects of the raising-the-official-pension-age policy in an overlapping generations economy

This paper studies how economic variables are affected by raising the official pension age. Although it is said that such a policy increases output, this paper shows that such a statement is not necessarily true. Moreover, the paper finds that the social security benefit can decrease, which implies that it might be impossible to sustain the same level of benefit only by such a policy.     

GROWTH AND WELFARE EFFECTS OF AN ENVIRONMENTAL TAX‐BASED PUBLIC PENSION REFORM*

This paper presents an overlapping generations model in which: (i) firms create emissions as by‐products of production; and (ii) tax revenue from the working young is transferred to the retired elderly as pay‐as‐you‐go pension benefits. The paper focuses on a replacement ratio, which measures the proportion of after tax work earnings replaced by the public pension, and considers a replacement ratio neutral reform in which the newly introduced environmental tax is devoted to cutting the social security tax, keeping the replacement ratio unchanged. It is shown that the reform may improve growth, environmental quality and the nonenvironmental utility of every generation.     

Endogenous retirement and public pension system reform in Spain

Population aging has spurred developed countries around the world to reform their PAYG pension systems. In particular, delaying legal retirement ages and reducing the generosity of pension benefits have been widely implemented changes. This paper assesses the potential success of these policies in the case of the Spanish economy, and compares them with the results obtained by the (rather modest) reforms already implemented in 1997 and 2001. This evaluation is accomplished in a heterogeneous-agent dynamic general equilibrium model where individuals can adjust their retirement ages in response to changes to the pension rules. We check the ability of the model to reproduce the basic stylized facts of retirement behavior (particularly the pattern of early retirement induced by minimum pensions). The model is then used to explore the impact of pension reforms. We find that already implemented changes actually increase the implicit liabilities of the system. In contrast, delaying the legal retirement age and extending the averaging period in the pension formula to cover most of the individual's life-cycle can reduce the implicit liabilities substantially. These findings reveal the failure of the Spanish political system to distribute the costs of population aging more evenly across the generations.     

Designing social security - a portfolio choice approach

Public social security systems may provide diversification of risks to individuals’ life-time income. Capturing that a pay-as-you-go system (paygo) may be considered as a “quasi-asset”, we study the optimal size of the paygo system as well as the optimal split between funded and unfunded pension saving by means of a theoretical portfolio choice framework. A low-yielding paygo system can benefit individuals if it contributes to hedge other risks to their lifetime resources. Numerical calculations indicate that optimal social security systems should be at least partly paygo financed in many economies. The optimal magnitude of the paygo system depends on the specified risk concept as well as the stochastic properties of stock market returns and implicit paygo-returns.     

Public pensions and growth

This paper investigates the relationship between the size of an unfunded public pension system and economic growth in an overlapping generation economy, in which altruistic parents finance the education of their children and leave bequests. Unlike the existing literature, we model intergenerational altruism by assuming that children's income during adulthood is an argument of parental utility. Unfunded public pensions can promote growth when families face liquidity constraints preventing them from investing optimally in the education of their children. We consider two alternative ways of financing a public pension system, either by levying social contributions in a lump-sum manner or in proportion to labour income. We find that there is no case for unfunded public pensions in economies where bequests are operative. By contrast, there exists a growth-maximising size of the public pension system in economies where bequests are not operative and individuals are sufficiently patient.     

Inequality, cooperation, and growth: An experimental study

In a three player dynamic public goods experiment, social output today determines production possibilities tomorrow. In each period, players choose to sabotage, to cooperate, or to play best response. Sabotage harms social output and growth. Mutual cooperation maximises both. The property rights to social output are distributed unequally. Extent and skew of inequality are varied. We observe equilibrium play in most cases. There is also substantial cooperation, but little sabotage. Our exogenous variations of inequality are neutral to growth, neither negatively correlated to cooperation, nor positively correlated to sabotage. The neutrality result is shown to be sensitive to the dynamic nature of the employed game.     

The Troika paradox

In three binary choice problems, people reveal a choice pattern which falsifies expected utility theory and many generalized non-expected utility theories. This new paradox challenges popular non-expected utility models analogously to how the Allais paradox challenged neoclassical expected utility theory.     

Do people respond to tax incentives? An analysis of the Italian reform of the deductibility of home mortgage interests

Before 1992 mortgage interests in Italy were fully tax deductible up to 3500 Euro (7000 for two cosigners). In 1992-1994 the government implemented a series of tax reforms whose ultimate effect was to eliminate the relation between the after-tax mortgage rate and the marginal tax rate. Using data from the 1989-2002 Survey of Household Income and Wealth we test if the elimination of incentives has affected the sensitivity of the decision to borrow and the amount borrowed with respect to the marginal tax rate. Regression analysis and difference-in-differences estimates indicate that tax considerations have not affected the demand for mortgage debt, neither at the extensive nor intensive margin. These results are consistent with lack of financial information and credit rationing during the sample period.     

Social security and risk sharing

In this paper we identify conditions under which the introduction of a pay-as-you-go social security system is ex ante Pareto-improving in a stochastic OLG economy with capital accumulation and land. We argue that these conditions are consistent with realistic specifications of the parameters of the economy. In our model financial markets are complete and competitive equilibria interim Pareto efficient. Therefore, a welfare improvement can only be obtained if agents? welfare is evaluated ex ante, and arises from an improvement in intergenerational risk sharing. We also examine the optimal size of a given social security system as well as its optimal reform.     

Overconfidence as a social bias: Experimental evidence

The overconfidence bias is discussed extensively in economic studies, yet fails to hold experimentally once monetary incentives and feedback are implemented. We consider overconfidence as a social bias. For a simple real effort task, we show that, individually, economic conditions effectively prevent overconfidence. By contrast, the introduction of a very basic, purely observational social setting fosters overconfident self-assessments. Additionally, observing others’ actions effectively eliminates underconfidence compared to the individual setting.     

The effect of ambiguity aversion on reward scheme choice

We test the implications of ambiguity aversion in a principal–agent problem with multiple agents. Models of ambiguity aversion suggest that, under ambiguity, comparative compensation schemes may become more attractive than independent wage contracts. We test this by presenting agents with a choice between comparative reward schemes and independent contracts, which are designed such that under uncertainty about output distributions (that is, under ambiguity), ambiguity averse agents should typically prefer comparative reward schemes, independent of their degree of risk aversion. We indeed find that the share of agents who choose the comparative scheme is higher under ambiguity.     

THE CASE FOR PAY-AS-YOU-GO PENSIONS IN A SERVICE ECONOMY

The elderly consume more labour‐intensive services than young individuals. This makes them vulnerable to rising costs of services due to higher wages, which can be caused by increased capital accumulation. This paper shows that in a model with a service sector, the golden‐rule capital stock is lower and dynamic inefficiency is more likely to occur than in the conventional one‐sector model. This implies that in many cases, a positive Pay‐As‐You‐Go tax maximises long‐run welfare in a service economy. Calculations based on data from the United Kingdom and the Netherlands show that the long‐run optimal degree of funding coincides with the current situation in these countries.     

Behavioral spillovers and cognitive load in multiple games: An experimental study

We present evidence from laboratory experiments of behavioral spillovers and cognitive load that spread across strategic contexts. In the experiments, subjects play two distinct games simultaneously with different opponents. We find that the strategies chosen and the efficiency of outcomes in one game depends on the other game that the subject plays, and that play is altered in predictable directions. We develop a measure of behavioral variation in a normal form game, outcome entropy, and find that prevalent strategies in games with low outcome entropy are more likely to be used in the games with high outcome entropy, but not vice versa. Taken together, these findings suggest that people do not treat strategic situations in isolation, but may instead develop heuristics that they apply across games.     

The political economy of contributive pensions in developing countries

This paper sheds light on the role of public institutions as a way to reduce tax evasion through a close link between payroll taxation and pension benefits. We use a political economy model in which agents have the possibility to hide part of their earnings in order to avoid taxation and, where the public system is more efficient in providing annuitized pension benefits than the private sector. We show that in the absence of evasion costs, agents are indifferent to the tax rate level as they can always perfectly adapt compliance so as to face their preferred effective tax rate. There is unanimity in favour of the maximum tax rate and, the public pension system is found to be partially contributive in order to increase tax compliance and thus the resources collected. This, in turn, enables higher redistribution toward the worst-off agents. When evasion costs are introduced, perfect substitutability between compliance and taxation breaks down. At the majority-voting equilibrium, individuals at the bottom of the income distribution who are in favour of more redistribution, and those at the top who want to transfer more resources to the old age, form a coalition against middle-income agents, in favour of high tax rates. In addition to the previous tax base argument, the optimal level of the Bismarkian pillar is now chosen so as to account for political support.     

On the role of social wage comparisons in gift-exchange experiments

This study extends a bilateral gift-exchange experiment by Clark et al. (2010). We investigate how the provision of either quantitative or qualitative information on the average wage paid in all worker-employer relationships impacts the wage set by employers and worker performance. We find that information on the average wage reduces (increases) both wage offers and effort levels in one-shot (repeated) relationships.     

Incentive effects: The case of belief elicitation from individuals in groups

Non-incentivized belief elicitation has a negative effect on the belief accuracy of experienced observers predicting choices in 2 × 2 matrix games. This negative impact extends to the accuracy of group beliefs and revised beliefs after forecasters know each other's initial beliefs.