Hyperbolic pension systems
Hyperbolic pension systems
The eternal debate about which social insurance systems are best suited for a society and especially one with an aging population like Italy and Germany changes in many respects when one takes into account that many individuals are short-sighted or procrastinate. We provide theory and evidence for this case, both on the micro and macro level.
good morning my task here is to give the floor to professor axel berge supan one of the most important experts in germany he teaches this subject in munich and since 2015 he has been directed directing the munich center for the economics of aging in the past they taught at harvard dortmund and mannheim and he's a member of the group of experts for demography for the federal government and he also uh counseled oecd and the european commission borsch is well known for giving a fundamental contribution to statistics knowledge on the behavior of individuals and their choices in terms of pension and health and he launched the sheer project that is a statistical survey on uh aging and uh pension schemes in the 27 eu member states based on a similar project in america so if we today we know something more about how european people think about a wealthier state and pension and well we owe that to him europe is a continent which aims at standardization but it is still characterized by differences there is a lot of heterogeneity also in terms of welfare state and pension schemes unlike the us which are based on private systems in europe most welfare systems are managed and funded by government and then they are interested by a phenomenon which is the population aging in our case in 2065 in less than 50 years the italian population will be equal to 53 million inhabitants 7 million inhabitants fewer in his presentation today professor berger supan will dwell on the effects and consequences of an intellectual trap called as hyperbolic discounting the trend to underestimate the monetary value of the consequences of our choices the further the future of these choices are this uh short-sighted attitude that we find also in the choices of savers well when this takes place also in the uh pension life well this can entail very negative consequences that is the priority given by individuals to a short horizon implies a tendency to save less than necessary and in that way we will worsen a situation which is already present at a world level that is a welfare deficit which is going to increase in the next few years there is a book a report by the world economic forum called we will live up to 50 100 years can we afford that so you see the pensions are a sort of a time bomb for developed countries because of aging in 2050 according to this study we will have a gap of 234 trillion dollars and then there is another aspect to consider the part of well the fact that the ability to look beyond is not equally distributed so what shall we do for those who are left behind by the society are publicly funded assistance better than private ones well he will tell us and then i'd like to raise a couple of questions and the professor will answer at the end of his presentation the first question is what is the impact of the big recession on young generations young people have seen a drastic reduction of their ability to save and with reference to italy i'm thinking of a young people who have precarious jobs and still live with their families of origin because they are not self-sufficient economically and it's about eight million people and then the second question that i'd like to raise is whether he thinks that in europe at a macroeconomic level future pensions cannot be funded uh by relying more on the economic growth that is not so much on more savings but on more investments and more domestic demand professor bart supen the floor is yours and i really appreciate being here it's such a nice and peaceful city quite a contrast to london for example these days to reno even in germany we had a two days ago a major crisis due to terrorism um anyway um so i'm glad to be here and i've enjoyed quite a bit since this is my first time i don't know what the audience is who is an economist among you okay that tells me something and in particular if i uh if i listen to the translator i will be somewhat slower the general theme of the of the conference is health inequalities and this seems to be a very very different topic it is not and it is not because the inequalities in our society are amazingly correlated so it's not only the the the those people who have poor health are not only those who have uh usually less income than the others uh but they're also less educated uh they know less and they make more mistakes for example in saving decisions or in decisions about old age and they also regret most and i would show some evidence what has gone wrong in their lives so it's really uh if in all of those dimensions of of life you see how correlated health income education and decision making is and that is part of the the lecture i want to give it's actually a very strange kind of title does that appear by itself so i will do it actually it's a very strange title uh it talks about hyperbolics which is short-sighted people uh economists always have names which nobody else understands that's part of the uh what we call science the medical profession does similar things by the way and i tried to link this with pension reform and to give you a short outline i talk a little bit about the background of pension reform most of that you will know and how different pension systems in europe address this uh and this will go very quickly to the symbol of of the festival of economics in toronto which is the squirrel what does the squirrel do it's actually saving right it puts little nuts in the fall and during the winter it gets them out again and eats of those sets so the squirrel really is the uh is the symbol of saving and i will talk about savings behavior um now then i'm not sure i will get through the entire agenda i talk a little bit about my own country germany did that saving actually work and you will see well the glass is half full half empty it did not completely fail but it not it did not work perfectly either and then there's some theories why that is so and one of the most interesting theory which economists are now really have a hype about is what we call hyperbolics or procrastination time inconsistent behavior where you think well tomorrow i do better but i will postpone it to tomorrow and then tomorrow well you say the same about and then you see how things get worse and worse and worse now the interesting thing is do people actually realize this kind of behavior do they understand when they are old look backwards on their life that they actually did things wrong and we collected some evidence on that which shows that this is the case but it's very differentially the case and that goes gives me back to the theme of the conference there's more regret about bad decisions among those who are poorer less educated and therefore probably also less healthy if i have time to talk a little about the macroeconomic consequences of such behavior but i'm not sure i get there okay so the background i think you know there's some countries which don't age very much uh for example the uk or the united states or the scandinavian countries in their countries and i showed them here in gray uh rather than spring green uh which aged quite a lot uh japan is a front-runner number two is italy right uh but also germany belongs there and the other uh mediterranean countries um now all these countries in spite of that uh the the different aging process uh the speed of aging is almost the same in all these countries and it about doubles uh within the next generation so that means in in the relatively young countries we'll have about 40 retirees per 100 workers whereas in the countries the greyish countries to the very right you will have about 80 retirees for for 100 workers now just imagine 80 retirees have to be handled by supported by 100 workers uh that's really a lot of uh and this is what has been referred to earlier as uh the the time bomb of pensions uh which we have uh in europe uh particularly in the south uh and in japan but if you actually look at this time bomb the demography and then the pension expenditures which are forecasted for which which are which you currently observe then there is a straight relation but it's not a hundred percent um and you see some countries are actually doing better they spent less than the average country given their demography these are mainly the scandinavian countries and other countries are doing worse they spend more america is north america is part of those who spend quite a bit austria not far from here and of course italy as we know so this has a lot to do with design of the pension systems and there are worse designs and better designs and that is why pension reform is on the agenda and it has been in on the agenda in this countries for i don't know at least 20 years even longer and it's on the agenda in other countries right now and it may come to the agenda in some big european countries very soon so if if you look at the future of pension expenditures now you have to guess which is which country is what then you see at the bottom that's easy to guess that's the united states there's almost no change in pension expenditure actually if you read the numbers closely it's about 20 very small increase the black one is the european union uh germany is a little bit more uh has high a little bit higher expenditures but not as big as an increase now guess which is the green one it's very high right now actually the highest in the european union but then it doesn't increase very much italy exactly exactly it's italy and that is due to the many pension reforms which have happened uh particularly the very strong reform uh during the the monty government now you see the orange one that's spain much less pen pen pension expenditures a couple years ago but strongly increasing uh and the blue one everybody i think knows and i did choose the the names on purpose uh the the colors on purpose that's grease and it really uh skyrockets uh now if you look the this uh this increase in expenditures is something the government has promised you to pay once the young people retire they will get a certain pension level and these pension levels uh will create these expenditures which are increasing so much in spain and in uh and in greece now the question is how large are they these promises and what of these promises is actually covered by taxes and contributions and then you realize that a lot is not covered by by contributions in the future by taxes in the future it's just a promise now if you calculate how large these promises are uh you get a little bit dizzy uh i put it here for four of the countries in germany it's twice gdp per year so all the workers have to work for two years and do nothing but work for the pension system and then it will recover the uh the pension promises no consumption for their own no no other expenditures so it's a large number in italy it's almost 300 percent but then you see the the problem countries in the european union uh 650 in spain and more than 700 percent in in greece now this is part this is what we call implicit debt of the pension system so it's promises which are not covered by taxes and contributions so it's a promise which is based it's just a debt and it's not in the books of the government so this comes in addition to the debt which we all know which is large in greece and which is large in italy now this is the largest elephant in the room threatening macroeconomic growth in the future i claim and so it's really something you have to worry about and that is something governments have worried about for example the monte government with a very strict uh cuts in in pension benefit in italy which have contributed to at least keep the growth of the elephant sort of uh inbounds um unlike uh greece and uh in spain so what what what what was the general strategy in pension reforms now one big thing is prevent poverty and many countries have for example the netherlands or switzerland uh another neighbor here uh also in some degrees germany uh have a base pension and you always will get that base pension it cannot be below that that's a very helpful safety net some countries are still lacking this greece for example and that creates poverty and so it's important to do this but the main problem in terms of public finance and running a country uh and growth in the future is what we call sustainability this is the pension benefit for the normal person who is not threatened by a poverty but costs a lot of money uh to actually support in the pension system and there are usually two pillars in the pension system one is the pay-as-you-go pillar that is where the young people pay contributions and out of this point contribution uh the pensions will be financed and then there's a funded pillar and the funded pillar is uh that was a little fast the funded pillar is where the people themselves put money in a bank account some kind of account uh it will sit there for 30 years and then the people will will go to the accounts and draw it when they're 60 65 and over okay so let's go from pillar to pillar start with the pc go pillar uh the obvious thing is the increased retirement age because we live longer and longer and longer and stay healthier and healthier and healthier so we can also work a bit more and more people don't like this if they listen to retirement age in france they immediately stop the railways but that's a logical kind of consequence of population aging to have a higher retirement age the other one which uh sort of europeanistically is called replacement rate means you cut benefits it's not just not as generous as it used to be and there's several ways to do it i don't have time to go into detail italy actually has a very very elegant way to do automatically both the life expectancy adjustment and the replacement rate readjustment copied from the swedish system um and so italy is actually doing quite fine the second point is uh uh if you cut uh the replacement rate this is the uh uh this part here uh and you still want to have a similar high pension well then you have to do something for yourself uh and that is saving for old age and that is what i will concentrate uh on and there are several ways to do it some countries just force you to save for your old age so they take some money which you earn sometimes automatically put it out of your consumption uh and put it in an account and you have no choice about it so that is done for example in the netherlands and it's done in switzerland and it's the employer who is doing this uh partially now sometimes it's also the state in in sweden uh the government actually takes money from you you have no choice and puts it into a saving account now other countries are more liberal for example the united states but also germany and they leave it to the individual so the individuals have to make those decisions how much to save for example to fill the gap which has been created by uh making the pension systems more austere and i will show you that this works only so far and there's a very interesting sort of kind of in between which and again that's a nice word which the economists have invented is called nudging so it's not straight force but it sort of pushes you in a certain direction now if you think about your own kids uh now i'm speaking to the parents here sometimes you have to use brute force really luckily so sometimes you can just let it go with your kids but usually you try to sort of push them in a certain direction and it works if you're just patient enough and that is called sort of nudging you give incentives to these young people and they will do and that is now pioneered by by the uk a very interesting experiment which is one there now and you use this nudging because people now i come to the topic of the title because people are not perfectly looking forward and knowing exactly if the government decreases my pension by 10 percent then i have to save and i exactly have to save so much that it offsets those 10 that's a complicated computation and very few people actually know how to do it even some economists fail now so you you you try to give them hints you try to give them some little tricks where they rather save a little bit more and this is called nudging it's the art of moral uh persuasion little tricks and tricks for example that you sign a big stack of papers when you go to to a new job then you have to sign your labor contract the labor contract says all kinds of things you always have to show up monday at eight o'clock and there's a weekend and you have some so many days of vacation and there's also a sheet of paper which says and i will contribute uh ten percent of my salary of five percent myself pension fund and then the employer goes and says well why don't you just sign all that paper and don't don't read it just go ahead and it's done and you have a pension right uh and this is uh sort of this in between between force and uh involuntary things okay and you see this is the uh uh the the the squirrel actually is smart enough knows that there's a winter uh and hides these nuts um but with human beings we have to help it a little bit more okay i i show you some some evidence uh how saving worked in uh in in germany uh and i think i have to to rush a little bit here uh the germans uh i'm i'm a little bit on the ironical side invented saving for old age about 15 years ago they introduced the what's called the restore pensions which are state subsidized pension but completely voluntary and they took up quite a bit so within 10 years half of the population actually bought these kind of contracts for saving for an additional private pension so that worked fine in some sense because it went from zero to 50 percent of the population in ten years that's quite something but then it's stuck and it has never reached a hundred percent actually right now it's slightly decreasing so that's why what i mean with glass half full glass half empty right in the same time occupational pensions those financed by your employer also increased and all kinds of other saving accounts actually the the coverage of these kind of pension reached about three quarters of the population that they have some of these three instruments now even more interesting is if you think about the cuts in the government pensions and how much of these savings filled that cut that gap in the pension then it's an impressive kind of of result here now this is not easy to read this graph this means what percentage of the gap the pension gap has been filled by private saving now these are people who have filled it by 200 so they own not only filled the gap but saved an additional amount on top of it that's quite a bit but then on the other hand it's negative that means they have not only not filled the gap but even made debts so they go into retirement and look look at these numbers depending whether you put sorry this is german whether you put housing wealth in or housing wealth not in it's about 10 percent roughly who go indebted into retirement getting smaller pensions than they used to be so they're in really dire straits uh and you see the entire thing is in between this gets me back to the topic of the conference these inequalities here's over saving there's massive undersaving uh and there's everything in between so it's a very very different kind of picture than what the government wanted which is sort of to have everybody at that kind of blue line on average the experiment worked fairly well but a third or a quarter depending on whether you count housing or not is far from the average and something to worry about okay we can go a little bit deeper and talk about the occupational pension and the story again is these are the income quintiles so these are the lowest 20 of the population and look they have virtually no occupational pensions in germany whereas the rich people they do have and it has strongly increased this is time this has strongly increased this state about the same so saving works for these people occupational pension survey but uh it doesn't work well for for for these people right now if you go again uh that's another story but it tells you what the problems are this is now again saving uh in occupational pension by the size of the employer so to the right are big companies more than a thousand workers in the company and here a very small one one to four uh employers really a small kind of shop now in the big firms almost all more than 80 percent have an occupational pension on average it's only 54 and that's because on the lower one there's virtually no but the point of this graph which will become more and more complicated just wait a moment is uh if we so this is asking the employers now we also ask the workers we first ask uh whether they have access to pub to an occupational pension whether they have one and if we go through the mass then we find out that 40 percent who have an occupational pension don't know it somebody's safe for them but they don't realize and this is not a minority like five or ten percent it's 40 percent so the knowledge about what actually happens in terms of saving for old age is bad even if it's so close to your heart it's your employer it's your money which is taken out of your salary and the people still don't know obviously if we ask them how much how large is the contribution of your employer to your pension how much do you save yourself only a third knows this two-thirds have no idea what's going on now i'm telling the same story now for the voluntary pensions where the people really have to make decisions themselves now strikingly this worked better for the lower income people there's a lot of dynamics over time going from 2003 to 2013. both for the rich and the poor you see it's much stronger for the rich but at least there's something going on for the poor and about one-fifth has a research pension so it worked better but it's only one fifth eighty percent are uncovered they stick with the gap and that is what you have seen before those people who have very little coverage of the pension gap and will have less pension income than than the previous generation now again we ask that is a huge government subsidy to the savings plans so if you are poor in germany ninety percent of the saving will be paid by the government and less than two percent you have to less than ten percent you have to pay yourself so it's a huge it's really a gift by the government now we ask people are you eligible for that government subsidy and 50 who said i'm not eligible for that subsidy are actually eligible for the subsidy so a lot of money left that a lot of people left that money on the table uh because they did not know the rules and the bad thing is now this is a complicated graph is the poor people knew less about the roles than the richer people that again goes back to this general topic the inequalities in knowledge are as bad as the inequalities in health and the inequalities in uh in income okay there's a final point uh then i go ahead is uh the market for private savings for old age is super in transparent so it's not only that the people don't know themselves very much but it's also very hard to actually acquire that knowledge now this is a graph where i took for a good reason there are only numbers but between behind each number is an insurance company and a contract for all date savings now if i put the numbers on there and the names i would have one lawsuit after the other so that's why i keep him anonymous but no the point is so it's just a random order here i don't know what the order is um and what you see here is the administrative costs in so-called basis points now think about this generates maybe an interest rate of between one and a half and two percent uh this means that one percent of this uh will actually be taken away from administrative costs of running that saving account doing the advertisement paying the bonuses to the managers and all this kind of stuff okay and you see in many of these contracts you would lose more than half of your money due to high administrative costs now you would think that after 10 years of these contracts in the market in germany all those expensive kind of contracts would be gone because the people are smart enough to go and actually buy these very cheap contracts it's like if you have a market with cars and some of these cars come with two wheels and others come with four wheels well after a time you realize that a two wheel car doesn't really work and you it will vanish from the market right but this doesn't happen in financial products uh and it's a very stable kind of feature after 10 years we still have this super expensive uh contracts in the markets and very uh and and these have gained a little bit in market share but not much so what we learn is that the uh that the great world of economics uh where everything is well known where we have transparency in the markets and where the people make the right decisions uh is not present and has not worked at least in germany uh and that requires uh i i do think government invention in intervention okay now economists uh try to build models uh and actually there has been a lot of progress in putting these psychological components uh and the the features of lack of knowledge into their models that's something which economists have done a lot during the the last last 10 15 years actually longer as i will show you and i talked about procrastination because i think that is the most fascinating and most plausible kind of behavior so procrastination is you know it's better to do something but you postpone it right so one example is eating healthier we all know that we tend to eat too much and too fatty uh and we also should do more exercise but we tend to postpone it uh if you see the uh um now i think with tito i i went with you to the restaurant and i was a great fiorantina there is no the temptation overcomes you right away you have to eat it and well tomorrow i eat less right and we certainly had two bottles of red wine way too many uh and but tomorrow will behave better and uh that's a typical procrastination behavior now tomorrow unfortunately you're the same guy right uh and again you just succumb to temptation uh other example is for the students here in the room uh is writing your dissertation right uh it's a lot of fun to go through the literature and collect some data and but actually filling a empty piece of paper uh with something which then supposed to be your dissertation that tends to be procrastinated and it's a common experience among professors uh students uh start actually writing things put words on paper way too late and then it's a hurry um and the third one of course uh you have guests that is saving for old age uh if if you're in your 30s there's so many things to spend money on uh why not start with 32 right the savings contract at 32 well you keep going and you you know the story now so that is what's called procrastination and uh this has some elements of myopia but only some elements because you can be quite smart and actually know that you fail but still you do it uh and so it's it's it's slightly different from myopia myopia just means i don't care about the future but here you do but you sort of shift it and there are actually models in uh psychology and in economics where where where they're very sophisticated procrastinators they even put little devices in their own life uh uh uh to not procrastinate so much and that goes in the direction of what i call nudging uh so they put little little uh uh pieces of paper on the on the fridge saying don't eat so much right but then in the night it's dark you don't see that paper and you go in in any way uh so it's it's it's you know about these weaknesses uh but uh you you do it anyway uh and they're they're really interesting uh economic models uh and one one of the names we gave them is hyperbolic discounting which is a big name for for the insight that the future has a different weight uh the farther away it is uh from uh from uh from right now this is not new uh they're very interesting people have worked on these kind of theories in the 50s but it has been forgotten and it has been uncovered by by well-known economists and it had very recently become a kind of hype in economics now i grew up as a mathematician so i have to show you at least one slide with mathematics uh but i obviously will not go in but i the the the the the the bottom line i want to show you because there's a very very nice model which has been developed in the late 70s late early 80s which is there is your current self and there's your future self actually if you go in the literature there are a lot of novels about this uh so there there are two uh souls in your breast uh guter has uh says that and they're fighting each other right and this is exactly this procrastination behavior one wants to eat the big steak and have another bottle of red wine and the other one says well keep it down and they fight with each other and their economic models game theoretic models will model this fight between your current self and the future self and you compute how much these people save right and uh i have no time to go through i just show you a few graphs and they're they're these come out of these models if if now this is the the growth my myopia uh if people are completely myopic uh they over consume while they are working then comes retirement and then they under consume relative to the people who are less myopic um they same story they the the the old economic theories say the people safe until they retire and then they dis safe until they die uh whereas these short-sighted people save much less uh so they also have uh much less to consume out of their saving in older age these are mathematical models where you uh where you go really into details there's one table which is also very hard to understand i try to make it as easy as possible it also tells you something about welfare state and in pension systems um using exactly these kind of models there there are two columns here one is uh if if there's only a savings pillar as a pension system so that's why i i put the symbol in here okay and then there are various uh what i call pay as you go system where the young people pay for the old people uh the typical system in italy and germany uh in the united states uh and uh now here you get a certain interest rate and i assume this is three percent and here you also get an interest rate out of this now because if like in the united states the population is still growing and the people getting smarter every generation then you actually get more money out of this uh pay as you go system this pension system than you pay in because there are more kids actually paying your pension and they're also smarter so they are more productive and earn more and they can pay more of your pension and that is what really has driven uh the growth in pensions in in italy and in in germany until recently but then came aging and with aging this mechanism doesn't work anymore the next generation is still smarter than before but they're fewer so you don't get three percent out of your pension investment but only one percent in france is somewhat better maybe two percent now the point here is uh uh uh there if if people only save and they're myopic they're really bad off because they will have very little in their in their retirement age because they didn't save right uh and that depends on how uh how myopic these people are if so a basic psego system is a necessity when at least a share of the people are short-sighted you have to have some pay-as-you-go system that's a very important insight for pensions now even in a strongly aging country pay as you go is better for many people than a funded system a savings based system if the share of myopic or procrastinating people is large it only switches if the people are getting smarter and more aware of the future and behave more like economists used to assume then there is an advantage of the fully funded system versus the the ps ecosystem but we the economist had a long-term fight between those who think that one should really abolish these pay-as-you-go systems like in italy and germany and completely shift to savings and those who post it uh and psychology tells you that there is a big room for uh for these kind of quote unquote old-fashioned pay-as-you-go system uh just because people under under safe okay now that is what you sort of see from a helicopter point of view the professors and the uh the people who run pension systems uh the elite so to speak right uh we were also interested what the people think now that is pretty difficult to do uh what we did is we asked people whether they thought they did the right decisions in hindsight so we asked people 60 plus did you do the right savings decision yes or no now that is not completely easy uh but uh uh we uh we did this for the united states and we are currently doing this for for all kinds of european countries um so we ask um uh think back when you were around 45 years old these are 60 plus people suppose you could redo your spending and saving from then to now would you save more over the years would you save less over the years or did you do the right thing now in some sense this is easy to say exposed and many people don't realize although you have to think twice that if you save more you have to spend less so we did a second version of these and we made a little bit more clear spent less and safe over the years so that is to try to find out whether people tell us the truth or whether it's as you call in in english whether that was cheap talk now what we found out is a lot actually regretted that they saved too little and there was very little difference between the two versions of the question now what we also did is this is the number which shows up here we we asked them where could you have cut your spending and had a little escape clause no way i could have cut now if you ask me really three times in a row i think i did the right thing uh and you have seen about six to seven percent said well after all i think i did the right thing but still a majority have have done the wrong thing now just for fun guess what they what they what the people would have saved less for the men it was cars for women it was clothing and so it exactly corresponds our prejudices anyway so if you look a little bit about faciality i go now a little bit faster it was the uh the younger who regretted more have done the wrong things the poorer and the less educated and here i'm back in the inequalities uh and it shows you that those people are also aware that they did mistakes but now it's too late right now many people had shocks in their lives and i don't think i want to go into into details here lives do happen turn out differently than you think and we checked for this and there is a lot actually in in outcomes which were different from what they expected so they needed more spending than their expected and those regretted uh more uh they the income situation turned out to be less good as they expected they regretted more that they didn't save that the financial situation was worse well and people guess their pension many people don't know what their pension will be even at ages like 55 and again those who overestimated their their their pension wealth and it turned out to be uh their pension payment and turned about less than they expected uh had uh more regretted that they didn't save more than itself so uh going quickly to conclusions here uh the the the conclusion is is definitely that uh one has to help people to save more uh and uh these nudging tricks uh where you put a saving contract into the package of labor contracts may not be the worst kind of of policy but just believing that the people will do the right thing like we did in germany 15 years ago and still do the americans i think will leave 50 uncovered among the average people and 80 percent uncovered for those who are in need of of most of support in old age okay i think i won't go into into detail about the macroeconomics of procrastination uh just run through because i want to make one point it also affects the entire economy and if you have a model where where people are short-sighted it changes a lot of things how quickly an economy grows it will actually grow slower uh and it also uh creates this this uh creates differences uh in the relation to the uh uh to the foreign countries now as you uh you may know europe is financing a part of the united states donald trump is complaining about this but that is because his financial advisors have not completely succeeded of convincing the truth for him so europe pays actually a lot of the debt which which the united states is creating the other big financial supporter of the united states is japan and in the asian countries particularly china so here you see the the receiving countries which receive funds from from those countries who give funds now what does that mean these are the countries who save a lot and these are the countries the one country which saves very little so the americans are famous for spending a lot but saving very little whereas the europeans on average in the japanese in the chinese are known for saving a lot but spending relative to that much less so their savings actually go to the united states and eventually come back and that has something to do with old age pensions but it also has something to do with aging because uh in the course of aging you see the years going from now to 2050 and even later the europeans let's concentrate on them but also the japanese now safe on general quite a bit more than the united states but when they are older they actually cash in those savings and then you see it will turn around now what trump doesn't really understand is that when we save more and they save less that also automatically implies that more cars and whatever have to be shipped to the united states being produced in europe than the other way around all those three things hang together saving and uh and and investment spending and producing goods and and shipping them to another country and that will change in the course of aging now long story what i want to tell is if people are short-sighted this will be much less so uh you see these are the short-sighted uh calculations for the future these are the uh uh the uh uh the calculations uh if people are really have a long time horizon and i'm i'm putting this up as an example that if you think about short-sightedness hear about people then it changes the entire macroeconomic as well not to speak about the short-sightedness of some leaders and not to speak about the american leadership here okay let me conclude and finish um saving for eld is very heterogeneous we have observed remember that one picture that some people over say for old age more than 200 percent coverage of that gap and other are under saving they go even indebted into debt and this is not by chance uh this is not random but it's correlated education and incomes and this is the second point here but it's not the case that all good well-educated and rich people save a lot you have seen that there there's still a gap and that points to procrastination myopia even among the higher incomes and better educated now if there is a lot of myopia and procrastination in an economy uh that leads to substantially lower saving for old age by the way also higher interest rates it makes the ps ego system advantageous relative uh the funded pension system uh it lowers international capital flows these are the consequences i've shown you there is convincing evidence that people regret under saving and that gives some uh uh weight uh some justification to paternalistic policies uh where the government goes and says well you have to save uh either by force uh or by nudging by cheating tricking i should say you into into saving contracts but there are other serious market failures which make funded pillars difficult uh the lack of information market transparency i was showing you these uh huge costs marketing costs of some uh so there there's a lot of worry in in pension reform uh and some of these uh these market transparency policies will not be solved by uh by nudging approaches but even maybe worse because the government puts you into certain kinds of saving plans which the government actually selects and if the government is uh not a uh if the inter-organization doesn't work well then you get into problems as well and we had a lot of evidence even in germany where corruption actually was in play when uh when we were talking about occupational pension plans okay the first and foremost testing pension reform are therefore still those which i have shown don't make too much hype about these kind of things we have to stick with our pace you go pensions like the one in italy and we have to go through this bitter medicine of increasing retirement age decreasing generosity saving an old age can help a little bit but definitely will not solve the the main pension problems which we have thank you this was a long and complicated talk but it was supposed to show you that we economists do think about other dimensions as well so there was a lot of psychology in this talk uh and what the economists try to do is put the psychology in formal land actually in models which allow us to make policy predictions uh and that is i think what uh economists can can do so in that sense we're a little bit like the physicists who also use a lot of math this is hard for you to understand i know but part of this festival of economics is show what we're doing when we're in our ivory towers thanks a lot so i think we have five minutes for questions much for that comprehensive talk um i think if you would have paid more attention to the failure of the american system which we've had for 46 years that germany wouldn't have done the reister pensions we've learned that voluntary doesn't work and commercial doesn't work we also as economists have to be much better psychologists that there is way too much hype about procrastination or myopia and not enough appreciation for a basic human motivation which is fear and trauma so i humbly suggest that instead of talking about um hyperbolic procrastination on the the tort or the tiramisu that what is much more important for human beings we live a lot like squirrels especially in the lower um the lower half we have a lot of shocks in our life in a capitalist system we lose our jobs um we have divorces and and those fears overcome our so-called other intentions in our ideal world so i humbly suggest that fear become a much more important subject for us and that means the trauma of everyday life of capitalism and that nudging is very expensive the tax breaks that we've had over 46 years in the united states are more than all of savings and all those tax breaks go to the top 20 percent so the pension expense that you have in your first graph is actually much higher in the united states and we're much worse design because of the nudging the nudging feature yeah okay let me let me answer right away uh i i i appreciate your uh your comments uh you don't have to make them humbly i think they're well taken uh i think we you did a great job in uh putting a person uh in the top place which will teach us that uh us is not always the example uh and uh but it has been uh that's for sure and uh uh it was myself sitting in the pension reform committee strongly pushing for easter pensions and strongly advising against uh uh too much uh government coerciveness because i was driven by experiences of corruption and that is a big difference but i think you're right now there is very little economics of fear and fear anxiety trauma uh that are very interesting uh phenomena uh we we we are aware that there are shocks in life and you actually have seen a little bit of of that but sort of the psychology of already having some idea that there might be a shock coming and therefore you behave differently that that is not a well understood topic i agree in italian 10 years ago the bankruptcy of the deutsche bank showed the problem when a pension is not insured against the bankrupt bankruptcy what happens the new piece of law approved last week in germany reduces the responsibility of the company so what will be the effects in the future okay there so you allude to uh germany has these great long words the renting stuff gazettes these are five words glued to each other so this is the occupational pension strengthening law i think it's a marginal change it will not affect much and i have advised against that law because i think you need guarantees but you need smart guarantees and not the the classical ones but uh i'm not so much afraid of uh of bankruptcies because there is actually an insurance system behind this so you won't lose your uh your pension um but you may get lower returns so it's not the bankruptcy risk which is now larger under this new law but i think rates of return will go down now that sounds contradictory because first rates of return will go up because there's no guarantee anymore so that's cheaper to actually produce as a financial instrument but there will be as we all know mismanagement in these kind of things they happen in the capital market that's part of them uh and they will in the long run then again reduce the uh the rate of return uh there are not only shocks on the capital market though now let's remember that the big shock in 2008 in the financial crisis was that wages went down wages went down a lot they actually lowered in the first couple of years pay seo go pensions more than financial pensions because most of these financial pensions were were in bonds which had a fixed interest they were in some sense uh in in the short run isolated from the financial crisis so it was ironically the psu go system which was hit more by the financial crisis than uh than the funded system now in the longer run it's the opposite particularly because of the ecb policy actually there's another panel now which has started at 12 talking about how to get out of this policy but the low interest rate of course are doing now a detriment to the pension systems which are funded but it's a much more complicated story good morning i am a farmer well savings comes natural to us because we depend on the weather we know when we have to trim and harvest we usually do that once a year and not four times a year i remember that in italy till 1958 farmers or agriculture entrepreneurs anyway disease was not considered sickness was not considered so they had no benefits for sickness and pensions so whenever they got ill they had to fund that find out money somewhere so savings is part of the farmer's dna there is a saving that says that farmers live as poor people and they die as rich ones and that is good for their hairs this is my proposal might be funny or laughable but it's very serious what about if well every person could have a plot of land to know about nature indeed i am a part of this world but all the things we hear such as trust funds and escrow fans and so on this is this was invented by human beings so this is something very artificial so my question is this are there any states doing things like that i propose as you are an expert in pensions and thank you very much for your lecture well um farmers are a little bit like the squirrels right uh they uh they are dependent on putting things back saving uh they in the old days they also they would put the seeds back for for the next uh season to actually plant the new uh so i i suppose you you're doing apples right there are apples everywhere here in grapes i see okay and we actually lived for for a long time in the middle of the grapes in germany in the wine area anyway i did not talk about farmers self-employed people who are really able and have learned to take care of themselves and i'm not sure having a little plot of land will uh will teach you that uh because then you still have the big factory earnings on the site uh but you are completely dependent on on these mechanisms but even in here the society has learned and put a uh the european union has put a huge system there try to actually cover catastrophes so you have to save less than 20 or 40 or a hundred years ago the the we do live in an artificial world i think that was the most important sentence you said we have created in the industrial society an artificial world and we are actually proud of it in some sense uh and this will even accelerate if we go more and more into into direction of digitalization and it makes us more and more apart from sort of the basic instincts which we have learned as human beings now the squirrel is not smart in the sense that it makes a plane and then sort of thinks how many nuts do i have to hide in here or there it's it's uh it's instincts and intuition and we human beings have a lot of intuition and instincts but they don't fit our world anymore because we have created our artificial world now do we want to go back and become all farmers i'm not so sure and so we have to learn to live in that artificial world and perfectionize that world think about how we create artificial intuition artificial kind of mechanisms that's what the intellectuals have to work on but you have to talk to a philosopher any other questions well so i think we can conclude and thank you very much for your attention and thanks mr speaker goodbye you