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Experimental tests on consumption, savings and pensions

Experimental tests on consumption, savings and pensions. Enrique Fatás (Lineex and U. Valencia) Juan A. Lacomba (Lineex and U. Granada) Francisco Lagos (Lineex and U. Granada) Ana I. Moro-Egido (Lineex and U. Granada). Rome 2007. Motivation (1).

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Experimental tests on consumption, savings and pensions

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  1. Experimental tests on consumption, savings and pensions Enrique Fatás (Lineex and U. Valencia) Juan A. Lacomba (Lineex and U. Granada) Francisco Lagos (Lineex and U. Granada) Ana I. Moro-Egido (Lineex and U. Granada) Rome 2007

  2. Motivation (1) • Reforms of Social Security systems are now one of the main issues of most of industrialized countries' economic policy agenda.

  3. A new rule incentives to prolong the working period beyond the legal retirement age, 65.

  4. The german parliament increases the retirement age up to 67 years

  5. Motivation (1) • Reforms of Social Security systems are now one of the main issues of most of industrialized countries' economic policy agenda. • Why all these reforms? Two main problems: • The ageing of the population threats the viability of pay-as-you-go public pension systems. • Besides, pension systems in virtually all OECD countries in the mid-1990s made it financially unattractive to work after the age of 55. • Reforms aiming to increase the effective retirement age have mainly focussed on the reduction of this implicit tax.

  6. Motivation (2) • These reforms are named marginally actuarially FAIR pension systems and: • They are supposed to be neutral w.r.t the retirement decisions. • Life-time Contributions = Pension Benefits. • However, it could not be the right answer: • It disappears the intergenerational redistribution. • It may tend to undermine the political support for the pension system itself. • It might be no neutral and no effective.

  7. For all the pension benefits. • For a % of the pension benefits. • For extra-years worked after 65. Motivation (3) Motivation (3) • Do there exist alternative reforms to delay the retirement decisions? • LUMP-SUM pension systems • Fetherstonhaugh and Ross (1999) using a questionnaire find that: • More than 75% of the respondents preferred a one-time bonus to an increased annuity. • In the U.S. private industry some type of lump-sum benefit has become popular as an alternative to annuity payments. • Fatas, Lacomba and Lagos (2007) find in the lab that: • The more concentrated the payments (shifting from annuity into lump-sum), the more postponed the retirement decisions.

  8. Objective • The incorporation of a lump-sum payment as a measure to delay retirement decisions requires further analysis. • The impact on the poverty rates of the elderly. • The aim of this article is twofold: • To test the potential effects of implementing a lump-sum payment in a public pension system on consumption and saving behavior. • To analyze how closely the predictions of the optimality theory fit the actual behavior of subjects in a lab.

  9. Experimental literature on consumption behavior • Hey and Dardanoni (EJ, 1988). • Ballinger et al (EJ, 2003). • Carbone and Hey (EJ, 2004). • Brown, Camerer and Chua (2006). ---------------- o 0 o ---------------- • Two novel features of our benchmark: • Future income is uncertain with a decreasing probability of surviving. • Two levels of income: as worker and as retired. • This is the first experimental approach to examine a dynamic saving-consumption problem in a retirement framework.

  10. The experiment consists of at most 30 rounds. The higher the round, the lower the probability of surviving. Subjects receive three different levels of income according to a RETIREMENT period: A constant level of income during each period before R. A higher lump-sum of income in R. From R on subjects receive nothing. In each round subjects make only one decision: how much of their Cash Available to Consume/Save in that round. Borrowing is not allowed. Savings earn no interest. Consumption generates points: Points = 10*√consumption. Experimental Design

  11. Experimental procedures • Experiments were run at LINEEX (Dec, 2006). • 2 treatments: LS10 (20 subjects) and LS15 (19 subjects). • In each treatment, subjects played three sequences. • They were paid by one of these three sequences (randomly selected). • 1 h. 40 min. and €27 on average (exchange rate: 125 points = €1).

  12. Results: Consumption Decisions -- LS10

  13. Results: Consumption Decisions -- LS15

  14. Results: Saving Decisions -- LS10

  15. Results: Saving Decisions -- LS15

  16. Results: Behavioral Analysis

  17. Concluding remarks • If a lump-sum system is implemented, could the poverty rates as retired be increased? • Our results suggest that lump-sum payments could not yield increases in the elderly poverty rates. • Participants under-consume in the earliest periods. • Subjects over-react to the lump-sum payments. • After R, participants seem to smooth their consumption decisions. • Subjects over-saved. • Comparing treatments: the earlier and the lower the lump-sum payment, the higher the saving reaction. • Behavioral explanation: consumers seem to spend a fixed fraction of their endowment (more than of their cash available).

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