We present the evaluation of public policies aiming at boosting private savings. Such policies are becoming more and more popular as increasing longevity and declining fertility challenges pension systems around the world. The question remains: are those policies worth their cost? Standard tools are unable to capture the effects of tax incentivized policies that are supposed to increase old-age savings because they assume full rationality. Model enriched with four types of "irrational" behavior produces a very different evaluation of policies. Not only it is different from the evaluation based on a standard framework, but also the standard framework appears to approximate the enriched framework very poorly.

1. In need for policies and tools - new
modeling approach for demographic
challenges
10th Demographic Conference of "Young
Demographers“
Artur Rutkowski

2. Motivation:
• Demography is a challenge for pension systems
• Increase in savings is required
• Governments introduce costly policies to boost
savings
• Are they worth it?
• Standard tools not enough to answer…
• …because they assume full rationality
2

3. Contribution:
• We go beyond full rationality…
• Enriched framework for modelling savings
decisions
3

4. Plan
• Why demography is a challenge for pension
systems?
• Standard model with fully rational agents only
• Data on behavior – are people rational?
• Our contribution – Imperfect Rationality
introduced
• Instrument evaluation (standard vs enriched
framework)
4

5. Plan
5
• Why demography is a challenge for pension
systems?
• Standard model with fully rational agents only
• Data on behavior – are people rational?
• Our contribution – Imperfect Rationality
introduced
• Instrument evaluation (standard vs enriched
framework)

6. Why demography is a challenge?
6

7. Why demography is a challenge?
7
0%
10%
20%
30%
40%
50%
60%
70%
80%
Year
Share of pensioners whose pension benefit will
not exceed minimal
Statutory retirement age 60/65
Statutory retirement age 61/66
Statutory retirement age 67 for
both sexes

8. Plan
8
• Why demography is a challenge for pension
systems?
• Standard model with fully rational agents only
• Data on behavior – are people rational?
• Our contribution – Imperfect Rationality
introduced
• Instrument evaluation (standard vs enriched
framework)

9. Model:
9
• Overlapping Generations Model – economy
driven by demographics:
– Fertility
– Longevity
• General Equilibrium
• Firms
• Government
• Agents

10. Model:
10
• Overlapping Generations Model – economy
driven by demographics:
– Fertility
– Longevity
• General Equilibrium
• Firms
• Government
• Agents

11. Fully rational agents
11
• Agents maximize lifetime utility
• Smooth consumption
• Savings decision
– Wage
– Pension benefits
– Taxes
– Interest rate
– Impatience
– Mortality

12. Fully rational agents
12
• Agents maximize lifetime utility
• Smooth consumption
• Savings decision
– Wage
– Pension benefits
– Taxes
– Interest rate
– Impatience
– Mortality

13. Fully rational agents
13
• Agents maximize lifetime utility
• Smooth consumption
• Savings decision
– Wage
– Pension benefits
– Taxes
– Interest rate
– Impatience
– Mortality

14. Fully rational agents: smooth consumption
14
0%
20%
40%
60%
80%
100%
120%
20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Consumption(%ofcons@21y/o)
Age
Consumption

15. Fully rational agents
15
0
1
2
3
4
5
6
7
20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Savings
Age
Private savings

16. Fully rational agents
16
0
1
2
3
4
5
6
7
20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Savings
Age
Private savings
Instrument

17. Fully rational agents
17
0
1
2
3
4
5
6
7
20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Savings
Age
Private savings
Instrument
Sum

18. Fully rational agents
18
0
1
2
3
4
5
6
7
20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Savings
Age
Sum

19. Fully rational agents
19
0
1
2
3
4
5
6
7
20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Savings
Age
Sum
Private
savings

20. Plan
• Why demography is a challenge for pension
systems?
• Toy model with fully rational agents only
• Data on behavior – are people rational?
• Our contribution – Imperfect Rationality
introduced
• Instrument evolution (standard vs enriched
framework)
20

21. Are people “fully rational”?
• Well, not everybody.
• Myck, Lachowska (2018)
– Fully Rational: people with collage education
• Tyros at al. (2019)
– None among less affluent households
• So what about others?
21

22. Plan
• Why demography is a challenge for pension
systems?
• Toy model with fully rational agents only
• Data on behavior – are people rational?
• Our contribution – Imperfect Rationality
introduced
• Instrument evolution (standard vs enriched
framework)
22

23. Enriched modelling framework
• Imperfect Rationality introduced:
– Time inconsistency (TI)
– Adaptive learners (AL)
– Financial illiteracy (FI)
– Hands-to-Mouth (HTM)
23

24. Enriched modelling framework
• Imperfect Rationality introduced:
– Time inconsistency (TI)
– Adaptive learners (AL)
– Financial illiteracy (FI)
– Hands-to-Mouth (HTM)
24

25. Enriched modelling framework
• Imperfect Rationality introduced:
– Time inconsistency (TI)
– Adaptive learners (AL)
– Financial illiteracy (FI)
– Hands-to-Mouth (HTM)
25

26. Enriched modelling framework
• Imperfect Rationality introduced:
– Time inconsistency (TI)
– Adaptive learners (AL)
– Financial illiteracy (FI)
– Hands-to-Mouth (HTM)
26

27. Enriched modelling framework
• Imperfect Rationality introduced:
– Time inconsistency (TI)
– Adaptive learners (AL)
– Financial illiteracy (FI)
– Hands-to-Mouth (HTM)
27

28. Plan
• Why demography is a challenge for pension
systems?
• Standard model with fully rational agents only
• Data on behavior – are people rational?
• Our contribution – Imperfect Rationality
introduced
• Instrument evolution (standard vs enriched
framework)
28

29. Standard framework – welfare analysis
29
-0.7%
-0.6%
-0.5%
-0.4%
-0.3%
-0.2%
-0.1%
0.0%
0.1%
0.2%
0.3%
0.4%
1919 1939 1959 1979 1999 2019 2039 2059 2079
%oflifetimeconsumption
Birth year
Fully Rational

30. Enriched framework – welfare analysis
30
-1.4%
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
1919 1939 1959 1979 1999 2019 2039 2059 2079 2099
%oflifetimeconsumption
Birth year
Fully Rational

31. Enriched framework – welfare analysis
31
-1.4%
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1920 1940 1960 1980 2000 2020 2040 2060 2080
%oflifetimeconsumption
Birth year
Fully Rational
Time Inconsistent

32. Enriched framework – welfare analysis
32
-1.4%
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1919 1939 1959 1979 1999 2019 2039 2059 2079 2099
%oflifetimeconsumption
Birth year
Fully Rational
Time Inconsistent
Adaptive Learners

33. Enriched framework – welfare analysis
33
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
1919 1939 1959 1979 1999 2019 2039 2059 2079 2099
%oflifetimeconsumption
Birth year
Fully Rational
Time Inconsistent
Adaptive Learners
Finacially Illiterate

34. Enriched framework – welfare analysis
34
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
1919 1939 1959 1979 1999 2019 2039 2059 2079 2099
%oflifetimeconsumption
Birth year
Fully Rational
Time Inconsistent
Adaptive Learners
Finacially Illiterate
Hands to Mouth

35. Enriched vs standard framework
35
Standard
Framework
Enriched
framework
Fully Rational 0.08% -0.90%
Time Inconsistent -0.45%
Adaptive Learners -0.61%
Financially Illiterate 5.01%
Hands to Mouth 32.54%
Total change of welfare: 0.08% 7.12%

36. Enriched vs standard framework
36
Standard
Framework
Enriched
framework
Fully Rational 0.08% -0.90%
Time Inconsistent -0.45%
Adaptive Learners -0.61%
Financially Illiterate 5.01%
Hands to Mouth 32.54%
Total change of welfare: 0.08% 7.12%

37. Fundacja Adeptów i Miłośników Ekonomii
Group for Research in APplied Economics
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e | grape@grape.org.pl
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fb | GRAPE.ORG