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The evaluation of public policies aiming at boosting private savings

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We present the evaluation of public policies aiming at boosting private savings. Such policies are becoming more and more popular as increasing longevity and declining fertility challenges pension systems around the world. The question remains: are those policies worth their cost?
Standard tools are unable to capture the effects of tax incentivized policies that are supposed to increase old-age savings because they assume full rationality. Model enriched with four types of "irrational" behavior produces a very different evaluation of policies. Not only it is different from the evaluation based on a standard framework, but also the standard framework appears to approximate the enriched framework very poorly.

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The evaluation of public policies aiming at boosting private savings

  1. 1. In need for policies and tools - new modeling approach for demographic challenges 10th Demographic Conference of "Young Demographers“ Artur Rutkowski
  2. 2. Motivation: • Demography is a challenge for pension systems • Increase in savings is required • Governments introduce costly policies to boost savings • Are they worth it? • Standard tools not enough to answer… • …because they assume full rationality 2
  3. 3. Contribution: • We go beyond full rationality… • Enriched framework for modelling savings decisions 3
  4. 4. Plan • Why demography is a challenge for pension systems? • Standard model with fully rational agents only • Data on behavior – are people rational? • Our contribution – Imperfect Rationality introduced • Instrument evaluation (standard vs enriched framework) 4
  5. 5. Plan 5 • Why demography is a challenge for pension systems? • Standard model with fully rational agents only • Data on behavior – are people rational? • Our contribution – Imperfect Rationality introduced • Instrument evaluation (standard vs enriched framework)
  6. 6. Why demography is a challenge? 6
  7. 7. Why demography is a challenge? 7 0% 10% 20% 30% 40% 50% 60% 70% 80% Year Share of pensioners whose pension benefit will not exceed minimal Statutory retirement age 60/65 Statutory retirement age 61/66 Statutory retirement age 67 for both sexes
  8. 8. Plan 8 • Why demography is a challenge for pension systems? • Standard model with fully rational agents only • Data on behavior – are people rational? • Our contribution – Imperfect Rationality introduced • Instrument evaluation (standard vs enriched framework)
  9. 9. Model: 9 • Overlapping Generations Model – economy driven by demographics: – Fertility – Longevity • General Equilibrium • Firms • Government • Agents
  10. 10. Model: 10 • Overlapping Generations Model – economy driven by demographics: – Fertility – Longevity • General Equilibrium • Firms • Government • Agents
  11. 11. Fully rational agents 11 • Agents maximize lifetime utility • Smooth consumption • Savings decision – Wage – Pension benefits – Taxes – Interest rate – Impatience – Mortality
  12. 12. Fully rational agents 12 • Agents maximize lifetime utility • Smooth consumption • Savings decision – Wage – Pension benefits – Taxes – Interest rate – Impatience – Mortality
  13. 13. Fully rational agents 13 • Agents maximize lifetime utility • Smooth consumption • Savings decision – Wage – Pension benefits – Taxes – Interest rate – Impatience – Mortality
  14. 14. Fully rational agents: smooth consumption 14 0% 20% 40% 60% 80% 100% 120% 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Consumption(%ofcons@21y/o) Age Consumption
  15. 15. Fully rational agents 15 0 1 2 3 4 5 6 7 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Savings Age Private savings
  16. 16. Fully rational agents 16 0 1 2 3 4 5 6 7 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Savings Age Private savings Instrument
  17. 17. Fully rational agents 17 0 1 2 3 4 5 6 7 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Savings Age Private savings Instrument Sum
  18. 18. Fully rational agents 18 0 1 2 3 4 5 6 7 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Savings Age Sum
  19. 19. Fully rational agents 19 0 1 2 3 4 5 6 7 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Savings Age Sum Private savings
  20. 20. Plan • Why demography is a challenge for pension systems? • Toy model with fully rational agents only • Data on behavior – are people rational? • Our contribution – Imperfect Rationality introduced • Instrument evolution (standard vs enriched framework) 20
  21. 21. Are people “fully rational”? • Well, not everybody. • Myck, Lachowska (2018) – Fully Rational: people with collage education • Tyros at al. (2019) – None among less affluent households • So what about others? 21
  22. 22. Plan • Why demography is a challenge for pension systems? • Toy model with fully rational agents only • Data on behavior – are people rational? • Our contribution – Imperfect Rationality introduced • Instrument evolution (standard vs enriched framework) 22
  23. 23. Enriched modelling framework • Imperfect Rationality introduced: – Time inconsistency (TI) – Adaptive learners (AL) – Financial illiteracy (FI) – Hands-to-Mouth (HTM) 23
  24. 24. Enriched modelling framework • Imperfect Rationality introduced: – Time inconsistency (TI) – Adaptive learners (AL) – Financial illiteracy (FI) – Hands-to-Mouth (HTM) 24
  25. 25. Enriched modelling framework • Imperfect Rationality introduced: – Time inconsistency (TI) – Adaptive learners (AL) – Financial illiteracy (FI) – Hands-to-Mouth (HTM) 25
  26. 26. Enriched modelling framework • Imperfect Rationality introduced: – Time inconsistency (TI) – Adaptive learners (AL) – Financial illiteracy (FI) – Hands-to-Mouth (HTM) 26
  27. 27. Enriched modelling framework • Imperfect Rationality introduced: – Time inconsistency (TI) – Adaptive learners (AL) – Financial illiteracy (FI) – Hands-to-Mouth (HTM) 27
  28. 28. Plan • Why demography is a challenge for pension systems? • Standard model with fully rational agents only • Data on behavior – are people rational? • Our contribution – Imperfect Rationality introduced • Instrument evolution (standard vs enriched framework) 28
  29. 29. Standard framework – welfare analysis 29 -0.7% -0.6% -0.5% -0.4% -0.3% -0.2% -0.1% 0.0% 0.1% 0.2% 0.3% 0.4% 1919 1939 1959 1979 1999 2019 2039 2059 2079 %oflifetimeconsumption Birth year Fully Rational
  30. 30. Enriched framework – welfare analysis 30 -1.4% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 1919 1939 1959 1979 1999 2019 2039 2059 2079 2099 %oflifetimeconsumption Birth year Fully Rational
  31. 31. Enriched framework – welfare analysis 31 -1.4% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1920 1940 1960 1980 2000 2020 2040 2060 2080 %oflifetimeconsumption Birth year Fully Rational Time Inconsistent
  32. 32. Enriched framework – welfare analysis 32 -1.4% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1919 1939 1959 1979 1999 2019 2039 2059 2079 2099 %oflifetimeconsumption Birth year Fully Rational Time Inconsistent Adaptive Learners
  33. 33. Enriched framework – welfare analysis 33 -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 1919 1939 1959 1979 1999 2019 2039 2059 2079 2099 %oflifetimeconsumption Birth year Fully Rational Time Inconsistent Adaptive Learners Finacially Illiterate
  34. 34. Enriched framework – welfare analysis 34 -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% 1919 1939 1959 1979 1999 2019 2039 2059 2079 2099 %oflifetimeconsumption Birth year Fully Rational Time Inconsistent Adaptive Learners Finacially Illiterate Hands to Mouth
  35. 35. Enriched vs standard framework 35 Standard Framework Enriched framework Fully Rational 0.08% -0.90% Time Inconsistent -0.45% Adaptive Learners -0.61% Financially Illiterate 5.01% Hands to Mouth 32.54% Total change of welfare: 0.08% 7.12%
  36. 36. Enriched vs standard framework 36 Standard Framework Enriched framework Fully Rational 0.08% -0.90% Time Inconsistent -0.45% Adaptive Learners -0.61% Financially Illiterate 5.01% Hands to Mouth 32.54% Total change of welfare: 0.08% 7.12%
  37. 37. Fundacja Adeptów i Miłośników Ekonomii Group for Research in APplied Economics w | grape.org.pl e | grape@grape.org.pl t | 799 012 202 tt | GRAPE_ORG fb | GRAPE.ORG

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