Pension contract design and free choice: Theory and practice
This paper discusses the insights from the field of behavioral economics with a focus on the implications for the design of pension schemes.
The first part of the paper provides an international overview of the most important results from the behavioral economics literature. Next, it introduces a systematic approach to think about how to take account of these deviations from the standard framework of fully rational consumers maximizing utility. It does so by assessing behavioral economics instruments with regard to the level of paternalism they entail. Moving up on the scale of paternalism implies a stronger steering of the choices of individuals. The factors that might influence the costs and benefits of steering stronger are assessed. Policymakers need to balance the risk of steering individuals in the wrong direction with the risk of not steering those individuals that (are likely to) make suboptimal choices. An analogy is made with statistical inference, where one needs to balance similar risks: The risk of not rejecting a false hypothesis and of failing to accept a correct hypothesis. This discussion sheds further insight into the use of behavioral instruments.
The second part of the paper discusses the use of behavioral instruments in the Dutch pension system. In particular, the paper explores the possibilities and rationale to increase the use of behavioral instruments, against the background of the recent pension agreement of social partners and the government.