Stimulating old-age savings under incomplete rationality

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Stimulating old-age savings
under incomplete rationality
Krzysztof Makarski (FAME|GRAPE, and WSE)
Patrick Puhani (Hannover...

Motivation
With rational agents,
• government-subsidized old-age savings schemes end up in crowd-out
• second order GE eﬀe...

Literature
General macro context
• hand-to-mouth
Weil 1992, Kaplan et al. 2014, Heathcote and Perri 2018, House et al 2018...

Literature
General macro context
• hand-to-mouth
Weil 1992, Kaplan et al. 2014, Heathcote and Perri 2018, House et al 2018...

Literature
4

Literature
Absent in macro, but well documented
• ﬁnancial (il)literacy
Lusardi and Mitchell 2014 and more empirical liter...

Our contribution
• Study the mechanics behind incomplete rationality in OLG
1. Behavioral heterogeneity
2. Voluntary old-a...

Our contribution
• Study the mechanics behind incomplete rationality in OLG
1. Behavioral heterogeneity
2. Voluntary old-a...

Results - preview
1. Private voluntary savings preferred to public PAYG
6

Results - preview
1. Private voluntary savings preferred to public PAYG
2. Consumption is better smoothened
6

Results - preview
1. Private voluntary savings preferred to public PAYG
2. Consumption is better smoothened
3. Poverty dec...

Results - preview
1. Private voluntary savings preferred to public PAYG
2. Consumption is better smoothened
3. Poverty dec...

Results - preview
1. Private voluntary savings preferred to public PAYG
2. Consumption is better smoothened
3. Poverty dec...

Results - preview
1. Private voluntary savings preferred to public PAYG
2. Consumption is better smoothened
3. Poverty dec...

Table of contents
Model
Policy reforms
Calibration
Results
Good news
Not so good news
Conclusions
7

Model

Model: overlapping generations
• Firms are perfectly competitive with Cobb Douglas production
Y = AKα
L1−α
• Government: t...

Model: overlapping generations
• Firms are perfectly competitive with Cobb Douglas production
Y = AKα
L1−α
• Government: t...

Households
• Born at j = 21 and live up to 100 years
• Face survival probability πj,t (where t = ISS, FSS)
• Choose labor ...

Households
• Born at j = 21 and live up to 100 years
• Face survival probability πj,t (where t = ISS, FSS)
• Choose labor ...

Households belong to a type κ
• presence bias: βκ
• ﬁnancial literacy: saving technology vs storing technology
10

Households belong to a type κ
• presence bias: βκ
• ﬁnancial literacy: saving technology vs storing technology
Presence bi...

Policy reforms

Policy reforms: longevity ↑
Rollout: stable replacement rate → ↑ in contribution rate
How much to ↑ τ to maintain b
Baseli...

Policy reforms: longevity ↑
Rollout: stable replacement rate → ↑ in contribution rate
How much to ↑ τ to maintain b
Baseli...

Policy reforms: longevity ↑
Rollout: stable replacement rate → ↑ in contribution rate
How much to ↑ τ to maintain b
Baseli...

Calibration

German economy
Demography
• Eurostat forecast
• longevity ↑
• fertility ↓
• age-speciﬁc productivity (following Fehr et al...

German economy
Financial market and ﬁrms
• interest rate r = 6%
• deprecation d → investment rate 20%
• capital share in G...

German economy
Financial market and ﬁrms
• interest rate r = 6%
• deprecation d → investment rate 20%
• capital share in G...

German economy
Financial market and ﬁrms
• interest rate r = 6%
• deprecation d → investment rate 20%
• capital share in G...

How to measure welfare eﬀects
Our agents have TI preferences (internally inconsistent):
1. ex ante: use Uj=1, so βκ betwee...

Results

Good news

Agents like the instruments – EET
15

Agents like the instruments – TTE
16

And instruments are better than mandatory PAYG
17

And instruments are better than mandatory PAYG
18

And instruments are better than mandatory PAYG
19

And (consumption) poverty declines
20

Not so good news

Assets for ﬁnancially illiterate (very) TI agents
21

Assets for ﬁnancially literate (very) TI agents
22

Assets for ﬁnancially illiterate (not so) TI agents
23

Assets for ﬁnancially literate (not so) TI agents
24

Macroeconomy
Table 1: Model results (relative to ISS)
Variable FSS (rollout) FSS (pensions decline) FSS EET FSS TTE
capita...

Conclusions

Conclusions
1. Government subsidies to old-age savings instruments:
26

Conclusions
1. Government subsidies to old-age savings instruments:
• help smoothening consumption and leisure
26

Conclusions
1. Government subsidies to old-age savings instruments:
• help smoothening consumption and leisure
• do not ac...

Conclusions
1. Government subsidies to old-age savings instruments:
• help smoothening consumption and leisure
• do not ac...

Conclusions
1. Government subsidies to old-age savings instruments:
• help smoothening consumption and leisure
• do not ac...

Conclusions
1. Government subsidies to old-age savings instruments:
• help smoothening consumption and leisure
• do not ac...

Questions or suggestions?
Thank you!
w: grape.org.pl
t: grape org
f: grape.org
e: j.tyrowicz@grape.org.pl
27

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