Pensions and Consumption Decisions: Evidence from the Lab

Pensioners have increasingly more control over their income streams as a result of pension reforms, which gives them more freedom to save for their old age. We devise an experiment where subjects face a life-cycle optimization task with lifetime uncertainty and a given lifetime income. The aims are to test whether subjects' saving and consumption behaviour is affected by: (i) the steepness of the income profile; and (ii) the freedom to choose the steepness of the income prole before the optimization task. In general, subjects' consumption decisions deviate systematically from the optimal ones in the sense that they are overly sensitive to current income and financial wealth. Subject behavior is unaffected by the steepness of the income. When subjects are given such a flexibility their consumption decisions are relatively more sensitive to current income and financial wealth.