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Experimental tests on consumption, savings and

pensions

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Enrique Fatás (Lineex and U. Valencia)

Juan A. Lacomba (Lineex and U. Granada)

Francisco Lagos (Lineex and U. Granada)

Ana I. Moro-Egido (Lineex and U. Granada)

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Motivation (1)

• Reforms of Social Security systems are now one of the main issues of most of industrialized countries' economic policy agenda.

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A new rule incentives to prolong the working period beyond the legal

retirement age, 65.

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The german parliament increases the retirement age up to 67 years

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Motivation (1)

• Reforms of Social Security systems are now one of the main issues of most of industrialized countries' economic policy agenda.

• Why all these reforms? Two main problems:

The ageing of the population threats the viability of pay-as-you-go public pension systems.

Besides, pension systems in virtually all OECD countries in the mid-1990s made it financially unattractive to work after the age of 55.

• Reforms aiming to increase the effective retirement age have mainly focussed on the reduction of this implicit tax.

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Motivation (2)

• These reforms are named marginally actuarially FAIR pension

systems and: They are supposed to be neutral w.r.t the retirement decisions. Life-time Contributions = Pension Benefits.

• However, it could not be the right answer: It disappears the intergenerational redistribution. It may tend to undermine the political support for the pension

system itself.It might be no neutral and no effective.

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Motivation (3)Motivation (3)

• Do there exist alternative reforms to delay the retirement decisions?

LUMP-SUM pension systems

• Fetherstonhaugh and Ross (1999) using a questionnaire find that: More than 75% of the respondents preferred a one-time

bonus to an increased annuity. • In the U.S. private industry some type of lump-sum benefit has

become popular as an alternative to annuity payments. • Fatas, Lacomba and Lagos (2007) find in the lab that:

The more concentrated the payments (shifting from annuity

into lump-sum), the more postponed the retirement decisions.

- For all the pension benefits.- For a % of the pension benefits.- For extra-years worked after 65.

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The incorporation of a lump-sum payment as a measure to delay retirement decisions requires further analysis.

The impact on the poverty rates of the elderly.

The aim of this article is twofold:To test the potential effects of implementing a lump-sum payment in a public pension system on consumption and saving behavior.To analyze how closely the predictions of the optimality theory fit the actual behavior of subjects in a lab.

Objective

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Hey and Dardanoni (EJ, 1988).

Ballinger et al (EJ, 2003).

Carbone and Hey (EJ, 2004).

Brown, Camerer and Chua (2006).

---------------- o 0 o ----------------

Two novel features of our benchmark: Future income is uncertain with a decreasing probability of surviving. Two levels of income: as worker and as retired.

This is the first experimental approach to examine a dynamic saving-consumption problem in a retirement framework.

Experimental literature on consumption behavior

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The experiment consists of at most 30 rounds.The higher the round, the lower the probability of surviving.

Subjects receive three different levels of income according to a RETIREMENT period:

A constant level of income during each period before R.A higher lump-sum of income in R. From R on subjects receive nothing.

In each round subjects make only one decision: how much of their Cash Available to Consume/Save in that round.

Borrowing is not allowed.Savings earn no interest. Consumption generates points: Points = 10*√consumption.

Experimental Design

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Rounds Pobability of

surviving LS10

Endowment LS15

Endowment Cash

Available Consumption Savings

Obtained Points

1 1 85 85 85 --- --- ---

2 29/30 85 85

3 28/29 85 85

4 27/28 85 85

5 26/27 85 85

6 25/26 85 85

7 24/25 85 85

8 23/24 85 85

9 22/23 85 85

10 21/22 85 85

11 20/21 191,25 85

12 19/20 85

13 18/19 85

14 17/18 85

15 16/17 85

16 15/16 345

17 14/15

18 13/14

19 12/13

20 11/12

21 10/11

22 9/10

23 8/9

24 7/8

25 6/7

26 5/6

27 4/5

28 3/4

29 2/3

30 1/2

0,00

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Experiments were run at LINEEX (Dec, 2006).

2 treatments: LS10 (20 subjects) and LS15 (19 subjects).

In each treatment, subjects played three sequences.

They were paid by one of these three sequences (randomly selected).

1 h. 40 min. and €27 on average (exchange rate: 125 points = €1).

Experimental procedures

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Results: Consumption Decisions -- LS10

05

01

00

150

Con

sum

ption

0 5 10 15 20 25 30period

Seq=1 Seq=2Seq=3 Ex-ante Cons.

Ex-ante Cons. and Actual Cons. by Seq. (R=10)

05

01

00

150

Con

sum

ption

0 5 10 15 20 25 30period

Seq=1 Seq=2Seq=3 Ex-post Cons.

Ex-post Cons. and Actual Cons. by Seq. (R=10)

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Results: Consumption Decisions -- LS15

05

01

00

150

Con

sum

ption

0 5 10 15 20 25 30period

Seq=1 Seq=2Seq=3 Ex-ante Cons.

Ex-ante Cons. and Actual Cons. by Seq. (R=15)

05

01

00

150

Con

sum

ption

0 5 10 15 20 25 30period

Seq=1 Seq=2Seq=3 Ex-post Cons.

Ex-post Cons. and Actual Cons. by Seq. (R=15)

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Results: Saving Decisions -- LS10

05

01

00150

Sa

vin

gs

0 5 10 15 20 25 30period

Seq=1 Seq=2Seq=3 Ex-ante Savs.

Ex-ante Savs. and Actual Savs. by Seq. (R=10)

05

01

001

50

Sa

vin

gs

0 5 10 15 20 25 30period

Seq=1 Seq=2Seq=3 Ex-post Savs.

Ex-post Savs. and Actual Savs. by Seq. (R=10)

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Results: Saving Decisions -- LS15

05

0100150Sa

vin

gs

0 5 10 15 20 25 30period

Seq=1 Seq=2Seq=3 Ex-ante Savs.

Ex-ante Savs. and Actual Savs. by Seq. (R=15)

05

01

001

50

Sa

vin

gs

0 5 10 15 20 25 30period

Seq=1 Seq=2Seq=3 Ex-post Savs.

Ex-post Savs. and Actual Savs. by Seq. (R=15)

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Results: Behavioral AnalysisPOOLED BREAK=10 BREAK=15

ACTUAL CONSUMPTION EXANTE EXPOST EXANTE EXPOST   EXANTE EXPOST

OPTIMAL CONSUMPTION -0.019 -0.374*** 0.225*** 0.511*** 1.072* 1.149* 0.759*** 1.623*** -0.201 -1.222*** 0.157* 0.295**

[0.121] [0.132] [0.081] [0.087] [0.571] [0.603] [0.266] [0.253] [0.169] [0.152] [0.094] [0.115]

ENDOWMENT 0.385*** 0.370*** 0.366*** 0.314*** 0.366*** 0.389***

[0.024] [0.024] [0.040] [0.044] [0.034] [0.027]

CASHAVAILABLE 0.005 0.007 -0.008 -0.018* 0.058*** 0.087***

[0.008] [0.008] [0.010] [0.010] [0.016] [0.017]

Observations 1172 1172 1172 1172 754 754 754 754 418 418 418 418

R-squared 0.41 0.28 0.41 0.29 0.31 0.23 0.31 0.26 0.53 0.41 0.53 0.33

Standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1%

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Concluding remarks

If a lump-sum system is implemented, could the poverty rates as retired be increased?Our results suggest that lump-sum payments could not yield increases in the elderly poverty rates.

Participants under-consume in the earliest periods.

Subjects over-react to the lump-sum payments.

After R, participants seem to smooth their consumption decisions.

Subjects over-saved.

Comparing treatments: the earlier and the lower the lump-sum

payment, the higher the saving reaction.

Behavioral explanation: consumers seem to spend a fixed fraction of

their endowment (more than of their cash available).