Pension and consumption decisions: Evidence from the lab
Pensioners have increasingly more control over their income streams as a result of
pension reforms, which gives them more freedom to save for their old age. We devise
an experiment where subjects face a life-cycle optimization task with lifetime uncer-
tainty and a given lifetime income. The aims are to test whether subjects’ saving and
consumption behaviour is aected by: (i) the steepness of the income profile; and
(ii) the freedom to choose the steepness of the income profile before the optimization
task. We find that subjects’ consumption decisions deviate systematically from the
optimal ones in the sense that they are overly sensitive to current income and finan-
cial wealth. Subjects’ behaviour is unaffected by the steepness of the income profile.
When subjects are given such a flexibility their consumption decisions are relatively
more sensitive to current income and financial wealth. Subject behavior is unaffected
by the steepness of the income profile.