Modelling Retirement Decisions with Incomplete Rationality - Insights for Policy Design
Final Report Abstract
This project deals with deviations from the assumption of individual decision making of rational agents in economics and how they relate to savings and retirement decisions. We analyse how personality characteristics (initially studied in psychology rather than economics) influence savings decisions, how financial illiteracy affects welfare effects of policy measures such as old-age saving schemes and how couples may co-ordinate their retirement decisions. Using person-level data for Germany, we find that personality traits traditionally used in psychology such as the “Big-Five” or internal vs. external “locus of control” explain accumulation of net wealth which can be used to prevent poverty after retirement. Our Polish project partners find that financially illiterate agents may benefit from government old-age savings schemes which would not be welfare-enhancing for completely rational agents. This finding is based on a simulation exercise based on an overlapping generations model calibrated to the German economy. Because a further project part demonstrates that personality traits are rather stable over time and hard to change, our results to some extent support state intervention to protect people from old-age poverty who are less confident or financially literate. Although these policies can be quite costly fiscally and have a large crowding-out component, we demonstrate that acknowledging significant shares of the population being incompletely rational may have implications for policies relating to old-age saving schemes. This also has implications for policies pertaining to retirement incentives: we show that changing wives’ incentives to retire has an impact on the retirement of husbands, especially if the retirement system allows for flexible pathways to retirement, such as in Germany. As a result, policy makers may want to consider retirement decisions as resulting from incentives in a family context rather than from incentives for individuals acting exclusively on their own.
Publications
- Are Incentivized Old-Age Savings Schemes Effective Under Incomplete Rationality? VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224526, Verein für Socialpolitik / German Economic Association.
Makarski, K., Tyrowicz, J. , Rutkowski, A.
