Hyperbolic Discounting and Pension Design : The Case of Germany

Both data and people's self-reports reveal that there is an 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