Who cares about the day after tomorrow? Pension issues when households are myopic or time inconsistent
Axel Börsch-Supan
Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy (MPISOC), München, Germany
Technical University of Munich (TUM), München, Germany
National Bureau of Economic Research (NBER), Cambridge, MA
Search for more papers by this authorKlaus Härtl
Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy (MPISOC), München, Germany
Technical University of Munich (TUM), München, Germany
Search for more papers by this authorCorresponding Author
Duarte Nuno Leite
Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy (MPISOC), München, Germany
Center for Economics and Finance at University of Porto (CEF-UP), Porto, Portugal
Correspondence
Duarte Nuno Leite, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy (MPISOC), Amalienstrasse 33, D-80799 München, Germany
Email: [email protected]
Search for more papers by this authorAxel Börsch-Supan
Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy (MPISOC), München, Germany
Technical University of Munich (TUM), München, Germany
National Bureau of Economic Research (NBER), Cambridge, MA
Search for more papers by this authorKlaus Härtl
Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy (MPISOC), München, Germany
Technical University of Munich (TUM), München, Germany
Search for more papers by this authorCorresponding Author
Duarte Nuno Leite
Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy (MPISOC), München, Germany
Center for Economics and Finance at University of Porto (CEF-UP), Porto, Portugal
Correspondence
Duarte Nuno Leite, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy (MPISOC), Amalienstrasse 33, D-80799 München, Germany
Email: [email protected]
Search for more papers by this authorAbstract
Pension economics has traditionally guided pension policy with the help of formal models based on individuals who think in a life-cycle context with perfect foresight, full information, and in a time-consistent manner. Associated macro models were mostly based on a single country. This paper sheds light on several aspects of pension economics when these assumptions do not hold using—to our knowledge—the first multi-country model of procrastinating households. Our focus is on the interaction between the share of procrastinators in a country, the speed and extent of population aging, and the size of an existing PAYG-DB pension system. Starting from the insight that procrastination reduces the volume of savings, we focus on three questions that are particularly relevant for the quickly aging Asian economies: What are the consequences for the balance between pay-as-you-go and fully funded pension systems? Where will retirement savings be invested in a globally linked world with very different pension systems and demographics? How large are global spillover effects of pension reforms in one region for the other regions in the world?
REFERENCES
- Angeletos, G. M., Laibson, D., Repetto, A., Tobacman, J., & Weinberg, S. (2001). The hyperbolic consumption model: Calibration, simulation, and empirical evaluation. Journal of Economic Perspectives, 15(3), 47–68.
- Apergis, N., & Tsoumas, C. (2009). A survey of the Feldstein-Horioka puzzle: What has been done and where we stand. Research in Economics, 63(2), 64–76.
10.1016/j.rie.2009.05.001 Google Scholar
- Ashraf, N., Karlan, D., & Yin, W. (2006). Tying Odysseus to the mast: Evidence from a commitment savings product in the Philippines. The Quarterly Journal of Economics, 121(2), 635–672.
- Attanasio, O. P., Bonfatti, A., Kitao, S., & Weber, G. (2016). Global demograhic trends: Consumption, saving and international capital flows. In J. Piggott & A. Woodland (Eds.), Handbook of the Economics of Population Aging (pp. 179–236). Amsterdam: Elsevier.
- Attanasio, O. P., Kitao, S., & Violante, G. L. (2007). Global demographic trends and social security reform. Journal of Monetary Economics, 57(1), 144–198.
10.1016/j.jmoneco.2006.12.010 Google Scholar
- Auerbach, A. J., & Kotlikoff, L. J. (1987). Dynamic fiscal policy. New York: Cambridge University Press.
- Bansal, R., & Yaron, A. (2004). Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles. The Journal of Finance, 4, 1481–1509.
- Beshears, J., Choi, J. J., Laibson, D., Madrian, B. C., & Sakong, J. (2011). Self control and liquidity: How to design a commitment contract (RAND Working Paper WR-895-SSA). Retrieved from http://web.williams.edu/Economics/seminars/laibsonSSRN.pdf
- Boeri, T., Börsch-Supan, A., & Tabellini, G. (2001). Would you like to shrink the welfare state? The opinions of European citizens. Economic Policy, 16(32), 9–50.
10.1111/1468-0327.00069 Google Scholar
- Boeri, T., Börsch-Supan, A., & Tabellini, G. (2002). Would you like to reform the pension system? The opinions of European citizens. American Economic Review, 92(2), 396–401.
- Börsch-Supan, A., Ludwig, A., & Winter, J. (2006). Aging, pension reform, and capital flows: A multi-country simulation model. Economica, 73, 292, 625–658.
- Börsch-Supan, A., Bucher-Koenen, T., Coppola, M., & Lamla, B. (2015). Savings in times of demographic change: Lessons from the German experience. Journal of Economic Surveys, 29(4), 807–829.
- Börsch-Supan, A., Bucher-Koenen, T., Ferrari, I., Kutlu Koc, V., & Rausch, J. (2016). The development of the pension gap and German households' saving behavior (MEA-Discussion Paper No. 02-2016). Munich: Munich Center for the Economics of Aging.
- Börsch-Supan, A., Härtl, K., & Leite, D. N. (2016). Social security and public insurance. In J. Piggott & A. Woodland (Eds.), Handbook of the Economics of Population Aging (pp. 781–864). Amsterdam: Elsevier.
10.1016/bs.hespa.2016.09.002 Google Scholar
- Börsch-Supan, A., Härtl, K., & Ludwig, A. (2014). Aging in Europe: Reforms, international diversification, and behavioral reactions. American Economic Review, 104(5), 224–229.
- Börsch-Supan, A., Hurd, M., & Rohwedder, S. (2016). Regret over previous saving decisions. Evidence from the American life panel (MEA Discussion Paper). Munich: Munich Center for the Economics of Aging.
- Börsch-Supan, A., & Ludwig, A. (2009). Aging, asset markets, and asset returns: A view from Europe to Asia. Asian Economic Policy Review, 4(1), 69–92.
- Börsch-Supan, A., & Ludwig, A. (2010). Old Europe is aging: Reforms and reform backlashes. In J. Shoven (Ed.), Demography and the economy (pp. 169–204). Chicago, IL: University of Chicago Press.
- Börsch-Supan, A., & Ludwig, A. (2013). Modeling the effects of structural reforms and reform backlashes: The cases of pension and labor market reforms. Economic Modelling, 35, 999–1007.
- Börsch-Supan, A., Ludwig, A., & Winter, J. (2007). Aging, pension reform, and capital flows: A multi-country simulation model. Economica, 73(292), 625–658.
- Brooks, R. (2003). Population aging and global capital flows in a parallel universe. IMF Staff Papers, 50(2), 200–221.
- Browning, M., Hansen, L., & Heckman, J. J., (1999). Micro Data and General Equilibrium Models. In: J. Taylor & M. Woodford, eds. Handbook of Macroeconomics. s.l.: Elsevier Science B.V., 543–633.
10.1016/S1574-0048(99)01011-3 Google Scholar
- Bucher-Koenen, T., & Lusardi, A. (2011). Financial literacy and retirement planning in Germany. Journal of Pension Economics and Finance, 10(4), 565–584.
- Chan, S., & Stevens, A. (2008). What you don't know can't help you: Pension knowledge and retirement decision making. Review of Economics and Statistics, 90(2), 253–266.
- Choi, J. J., Laibson, D., Madrian, B. C., & Metrick, A. (2002). Defined contribution pensions: Plan rules, participant choices, and the path of least resistance. In J. M. Poterba (Ed.), Tax policy and the economy(Vol. 16, pp. 67–113). Cambridge, MA: MIT Press.
- Coakley, J., Kulasi, F., & Smith, R. (1998). The Feldstein-Horioka puzzle and capital mobility: A review. International Journal of Finance and Economics, 3(2), 169–188.
- Crawford, R., & O'Dea, C. (2012). The adequacy of wealth of those approaching retirement (Institute for Fiscal Studies Reports). London: Institute for Fiscal Studies.
- Della Vigna, S., & Malmendier, U. (2006). Paying not to go to the gym. The American Economic Review, 96(3), 694–719.
- Domeij, D., & Floden, M. (2006). Population aging and international capital flows. International Economic Review, 47(3), 1013–1032.
- Fehr, H., Jokisch, S., & Kotlikoff, L. (2003). The developed world's demographic transition: The roles of capital flows, immigration, and policy (NBER Working Paper No. 10096). Cambridge, MA: National Bureau of Economic Research.
- Fehr, H., Habermann, C., & Kindermann, F. (2008). Social security with rational and hyperbolic consumers. Review of Economic Dynamics, 11(4), 884–903.
- Feldstein, M. S. (1985). The optimal level of social security benefits. The Quarterly Journal of Economics, 100(2), 303–320.
- Feldstein, M. S., & Horioka, C. (1980). Domestic saving and international capital flows. The Economic Journal, 90(358), 314–329.
- Feldstein, M. S., & Samwick, A. (1998). The transition path in privatizing social security. Chicago, IL: University of Chicago Press.
10.7208/chicago/9780226241821.001.0001 Google Scholar
- Frederick, S., Loewenstein, G., & O'Donoghue, T., (2002). Time Discounting and Time Preference: A Critical Review. Journal of Economic Literature, 40(2), 351–401.
- HMD (2008). The human mortality database. Retrieved from http://www.mortality.org/
- Imrohoroglu, A., Imrohoroglu, S., & Joines, D. H. (2003). Time-inconsistent preferences and social security. Quarterly Journal of Economics, 118(2), 745–784.
- Knoef, M., Been, J., Alessie, R., Caminada, K., Goudswaard, K., & Kalwij, A. (2016). Measuring retirement savings adequacy: Developing a multi-pillar approach in the Netherlands. Journal of Pension Economics and Finance, 15(1), 55–89.
- Laibson, D. (1997). Golden eggs and hyperbolic discounting. Quarterly Journal of Economics, 112(2), 443–477.
- Laibson, D. (1998). Life-cycle consumption and hyperbolic discount functions. European Economic Review, 42(3–5), 861–871.
- Ludwig, A. (2007). The Gauss–Seidel-quasi-Newton method: A hybrid algorithm for solving dynamic economic models. Journal of Economic Dynamics and Control, 31(5), 1610–1632.
- Lusardi, A., & Mitchell, O. S. (2011). Financial literacy around the world: An overview. Journal of Pension Economics and Finance, 10(4), 497–508.
- Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5–44.
- Lusardi, A., Michaud, P., & Mitchell, O. (2017). Optimal financial literacy and wealth inequality. Journal of Political Economy, 125(2), 431–477.
- Madrian, B., & Shea, D. (2001). The power of suggestion: Inertia in 401(k) participation and savings behavior. Quarterly Journal of Economics, 116(4), 1149–1187.
- Obstfeld, M., & Rogoff, K. (2000). The six major puzzles in international macroeconomics: Is there a common cause? In B. Bernanke & K. Rogoff (Eds.), NBER Macroeconomics Annual 2000 (Vol. 15, pp. 339–390). Cambridge, MA: The MIT Press.
10.3386/w7777 Google Scholar
- O'Donoghue, T., & Rabin, M. (1999). Doing it now or later. American Economic Review, 89(1), 103–124.
- OECD (2015). Pensions at a glance. Paris: OECD.
- Phelps, E. S., & Pollak, R. A. (1968). On second-best national saving and game-equilibrium growth. The Review of Economic Studies, 35(2), 185–199.
- Pollak, R. A. (1968). Consistent planning. Review of Economic Studies, 35(2), 201–208.
- Poterba, J. M. (2001). Demographic structure and asset returns. The Review of Economics and Statistics, 83(4), 565–584.
- Poterba, J. M., Venti, S., & Wise, D. (2012). Were they prepared for retirement? Financial status at advanced ages in the HRS and AHEAD cohorts. In D. Wise (Ed.), Investigations in the economics of aging. Chicago, IL: University of Chicago Press.
10.7208/chicago/9780226903163.003.0002 Google Scholar
- Rabin, M. (2013a). Incorporating limited rationality into economics. Journal of Economic Literature., 51(2), 528–543.
- Rabin, M. (2013b). An approach to incorporating psychology into economics. American Economic Review, 103(3), 617–622.
- Reisen, H. (2000). Pensions, savings and capital flows: From aging to emerging markets. Cheltenham, U.K.: Edward Elgar.
10.1787/9789264181625-en Google Scholar
- Repetto, A., Laibson, D., & Tobacman, J. (1998). Self-control and saving for retirement. Brookings Papers on Economic Activity, 1998(1), 91–196.
10.2307/2534671 Google Scholar
- Rios-Rull, J.-V. (2001). Population changes and capital accumulation: The aging of the baby boom. The B.E Journal of Macroeconomics, 1(1), 1–48.
- Strotz, R. H. (1956). Myopia and inconsistency in dynamic utility maximization. Review of Economic Studies, 23(3), 165–180.
- Thaler, R. H. (1994). Psychology and savings policies. American Economic Review, 84(2), 186–192.
- Thaler, R. H., & Shefrin, H. M. (1981). An economic theory of self-control. Journal of Political Economy, 89(2), 392–406.
- United Nations, Department of Economic and Social Affairs, Population Division (2012). World population prospects: The 2012 revision. New York: United Nations.
- Walker, E. A., Reno, V. P., & Bethell, T. N. (2014). Americans make hard choices on social security: A survey with trade-off analysis. Washington, DC: The National Academy of Social Insurance.
