Inequality in an OLG economy with intra-cohort heterogeneity and an obligatory pension system

1st meeting

At the working seminar of the Beethoven project (4-7 November) Jan presented our overlapping generations model. It will be used to check welfare effects of policies intended as incentives for increased retirement saving. Present were our co-authors from Leibniz University of Hanover: Patrick Puhani and Konrad Schäfer.

2nd meeting

The meeting was held in Hannover. We discussed the potential directions for contributing to the empirical and theoretical literature in our two joint papers.

The theoretical paper rests upon developing a model which adequately captures the response of private voluntary savings to the incentives embedded in the pension system. Current models have a very strong reaction because fully rational agents internalize completely the consequences of changes in the pension system. Their reaction is strong on both the intertemporal choice (savings) and intratemporal choice (labor supply). Meanwhile, empirical evidence is rather weak: people do respond to incentives, but to a much lesser extent. For example, Myck and Lachowska in a recent study using the evidence from Polish pension system reform show that the actual crowding out effect is there, but is rather small. We seek features of the consumer choice that will make model choices closer to what is observed in the data.

The empirical paper intends to address the question of early labor market quits in most advanced countries. Indeed, some earlier research shows that the disincentives embedded in the pension system may contribute to early labor market exits, even in the US. In a widely commented study, French shows that removing some of the kinks in the institutional design of the pension system are likely to extend the careers by as much as two years. However, studies such as this one leave no room for household optimization. We intend to develop the literature further in this direction.

3rd  meeting

The meeting was held in Warsaw and involved the whole Warsaw team and Patrick Puhani. We focused particularly on the theoretical paper and on the features we want the theoretical model to replicate. The model now features a variety of incompletely rational agents, but we still want to exploit further types of behavioral limitations. In the setup with incomplete rationality, we implement instruments fostering private voluntary savings. Given the divers nature of the government instruments, it is imperative to make them comparable in terms of the size of the government intervention. We currently work on the methods that allow us to make them comparable.

4th  meeting

The meeting was held in Hannover and involved the whole Hannover team and Joanna Tyrowicz. We worked the most on visualization of the project results, some very cool movies are to appear on this website shortly. The key component to understand the financial behavior of agents with incomplete rationality concerns the zero-borrowing constraint. In particular, one wants to understand the consequences of the following situation: expecting higher revenues in the future (e.g. because of the government-subsidized old-age savings instruments) the agents may want to borrow against this future income. It is conventional not to allow the agents in the model to have negative net assets, which is very close to the real world. But the consequences of this convention for welfare as well as macroeconomic effects are not very obvious.

5th meeting

The meeting was held in Trier, where Patrick Puhani and Joanna Tyrowicz worked on developing further the theoretical paper. The preliminary results form a model with a variety of incompletely rational agents and three types of voluntary pension savings instruments demonstrate that indeed policy options are not very obvious. Specifically, there are strong interactions between the presence of different types of agents in the economy and the features of the instruments intended at fostering savings. At this point, with those interesting results, we draft the first take on the main policy prescriptions.

6th meeting

The meeting was held in Prague, as the team members were passing by Prague and we could use this opportunity to work closely on the project development. Most of the attention was devoted to the microeconometric evidence on joint (and early) retirement decisions, which serves the purpose of designing our simulation tool for the joint microeconomic paper.  Our model now extends the current state-of-the-art on several dimensions and we are working on ingenious ways to show how our results would look without those multiple extensions (one at the time). 

7th  meeting

The meeting was held in Frankfurt, where we discussed our project outcomes with Alexander Ludwig. A super useful series of meetings for our theoretical paper. We discussed the features of the theoretical setup which are particularly useful for the demonstration purposes. We also chatted a bit about the sensitivity analyses and additional tests that would be of value to convince the elaborate on our findings. In particular, we talked on whether the model should have idiosyncratic shocks and what types of incomplete rationality are of particular interest in this strand of literature. Now, we sit down to implement all these comments in writing.

8th meeting

This was the longest of our meetings, two weeks of day by day hard work! We have concluded the work on our macroeconomic model and derived the results. We still have to run some sensitivity analyses, but the first draft of the text should be available soon. We also gave a lot of work and thought to our microeconomic paper: we studied the features of our SMM model and performed a number of policy experiments. Not all works as it should in this model, but with the insightful comments from WEAI presentation in San Francisco and with the pressure of getting ready for RCEA conference in Waterloo, were super motivated to fix the remaining issues. Finally, we also discussed a lot over the policy evaluation microeconometric paper using exogenous variation in retirement eligibility among women in Germany from the turn of century. We are really hopeful about this paper!

9th meeting

The meeting in London (where Patrick Puhani is spending his sabbatical) was incredibly constructive. We discussed thoroughly the macroeconomic paper, receiving insightful comments from UCL colleagues. We also finalized the policy design in our study. The paper is almost finished and we hope to be able to submit it to further conferences and workshops for 2020 events. For now, we prepare for the presentation at  Spanish Public Choice Workshop. The second part of the meeting was devoted to the microeconometric study.