Who cares about the day after tomorrow? Pension issues when households are myopic or time inconsistent

Axel Börsch‐Supan, Klaus Härtl and Duarte Semedo Leite

Review of Development Economics, 2018, vol. 22, issue 3, 953-989

Abstract: Pension economics has traditionally guided pension policy with the help of formal models based on individuals who think in a life‐cycle context with perfect foresight, full information, and in a time‐consistent manner. Associated macro models were mostly based on a single country. This paper sheds light on several aspects of pension economics when these assumptions do not hold using—to our knowledge—the first multi‐country model of procrastinating households. Our focus is on the interaction between the share of procrastinators in a country, the speed and extent of population aging, and the size of an existing PAYG‐DB pension system. Starting from the insight that procrastination reduces the volume of savings, we focus on three questions that are particularly relevant for the quickly aging Asian economies: What are the consequences for the balance between pay‐as‐you‐go and fully funded pension systems? Where will retirement savings be invested in a globally linked world with very different pension systems and demographics? How large are global spillover effects of pension reforms in one region for the other regions in the world?

Date: 2018
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