Financial Incentives and Retirement Decisions: Experimental Evidence

• Applicant: Professor Dr. Reinhold Schnabel
• Subject Area: Economic Policy, Applied Economics
• Term: from 2014 to 2016
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 251727389

This study analyses the impact of financial incentives on individual retirement entry decisions in a laboratory experiment. Empirical evidence in this specific field is unique and provides access to scientific findings on the optimal design of Pay-As-You-Go pension systems under controlled laboratory conditions. The central research questions of this project can be summarised as follows. In a first step, individual behavioural responses in the timing of retirement with respect to financial incentives are quantified. Under controlled laboratory conditions, those effects can be measured by comparisons between treatment groups that are subject to diverse incentive schemes. Second, economic literacy with respect to financial incentives in a Pay-As-You-Go pension system is analysed. The understanding and capability of conducting quantitative calculations and, most notably, determining the present value of expected future retirement income, may have a large impact on the timing of retirement. Third, aspects that are related to risk aversion are analysed. In this context we investigate to what extent retirement decisions are influenced by risk aversion and whether a actuarially neutral pension system must take into account risk aversion correspondingly. If we observe clustering of retirement entries at the earliest permissible retirement age despite actuarial neutrality, this indicates that individuals dread relatively early deceases and thus a relatively short period of pension benefit receipt in addition to preferences over consumption and leisure. Fourth, differences in sequential versus non-recurring retirement entry decisions are analysed. In the reality of the German public pension system, individuals are generally free to reevaluate retirement entry decisions until they really take place and therefore we observe a sequential structure. Therefore, the essence of the fourth research question is of methodological nature. If retirement behaviour is not influenced by the decision structure, laboratory experiments are feasible at much lower expenses, using non-recurring retirement entry decisions.By variation of single parameters, laboratory experiments are able to isolate the effects of specific policies on individual decisions making. This study fills this research gap by providing new findings for the optimal design of a Pay-As-You-Go pension system and it may as well generate implications for relevant policy design of the retirement age.

• DFG Programme: Research Grants