Hyperbolic discounting and pension designThe case of Germany

  • Stefan Zimmermann Stefan Zimmermann

Both data and people’s self-reports reveal that there is a undersaving problem. Behavioral economics seeks to explain this phenomenon with the concept of hyperbolic discounting. In essence, short-term actions are inconsistent with long-term goals.This is applied to the German pension system in this text. The results lean on a theoretical life-cycle model that is simulated in Matlab, whereby the parameters are calibrated to match the German economy. It is shown that myopic preferences lead to deviations from outcomes that would be desirable from a normative point of view. The savings rate is considerably lower for hyperbolic discounters, compared to standard discounters. Moreover, a fully funded pension scheme seems preferable to the current Pay-As-You-Go system.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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