Modelling pensions

Most macroeconomic models of pension systems assume people have perfect foresight and are rational. In these models, a correct response to longevity and some of the pension system reforms is to increase private voluntary savings and labor supply. However, real world data suggest that such response, if occurs at all, is relatively weak. It follows that life-time savings and labor supply decisions may be strongly affected by short-term concerns. We will design models with incomplete rationality that will be able to at least partially replicate this stylized fact. We will then consider if and which instruments incentivizing pension savings may be welfare enhancing.

Why should the public care?

For decades already, pension system reforms in many European countries, especially Poland, have been implemented without ex ante evaluation of the likely consequences, both in terms of macroeconomic outcomes and in terms of welfare. Our results will be able to inform policy, before any decisions are taken.

What is the goal of your research?

First, we will empirically introduce analyze the relationship between empirically the personality traits in analyzing the financial decisions. personality traits (“Big Five”, locus of control, risk aversion) and private saving and investment decisions using person-level survey data. Moreover, we plan to assess how different levels of financial literacy affect savings. The literature has been explicit on the paramount role of financial literacy, but so far the thorough behavioral analysis is failing to provide explanation of the observed puzzles. We posit that empirical framework enriched with a psychological analyses helps to overcome these shortcomings in the literature.

Second, we will put into test the implicit assumption that the intertemporal allocation of consumption/savings is ruled by the same mechanism as the decisions concerning the intratemporal allocation of consumption/leisure. Following the literature, we posit the transitivity property and test it put it into empirically test with reference to the using data on the timing of retirement timing decision.

Third, both these components will be nested in an overlapping generations (OLG) model with private voluntary private savings and financial literacy, to analyze the interplay between the retirement timing of retirement, overall savings and long-run macroeconomic stability. We posit that a tax incentivizing scheme can help to overcome the problem of insufficient private voluntary savings, thus, enhancing welfare.

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This project has received funding from the National Science Centre under decision no  DEC-2014/15/G/HS4/04638