Jan Mazza (University of Roma Tre)
Andrej Mijakovic
The elderly dissave less than predicted by standard life-cycle models, even when augmented with bequest motives and long-term care precautionary savings. This suggests that the marginal value of financial resources is not constant throughout old age. Yet, European public pension benefits tend to be approximately fixed throughout retirement. Could we improve welfare by adapting the time allocation of pensions? In this paper we propose a novel mechanism to account for the lack of wealth decumulation, namely a stochastic decay in the utility older individuals derive from consumption, and assess its implications for optimal pension design. We show that a budget-neutral reform that increases pensions in early retirement and decreases them later would be welfare-improving. Higher initial replacement rates smooth income and consumption across working life and retirement, and lower pension benefits in older age are discounted more heavily.