Toulouse School of Economics 16 , Rue Sainte Ursule

Strotz (1956) …rst suggested that people are more impatient when making short-run tradeo¤s than long-run ones. Many experimental studies supports this conjecture. Retirement decisions …t this description: when deciding whether retire or not, individuals may weight too much the costs of remaining at work (i.e. disutility of working an additional year, implicit tax on continued activity) and too little the bene…ts of postponed retirement (i.e. increase of the Bismarkian component of the pension formula), that are seen too far in the future. Impatience has another economic cost: individuals do not save enough for their post-retirement consumption, often regretting this lack of commitment. In this paper we propose a two-period OLG model with quasi-hyperbolic consumers who decide savings for post retirement consumption in the …rst period and the retirement age in the second. Wee show that this assumption is able to explain the observed drop in post retirement consumption and the observed high level of voluntary (i.e. not related to disability or dismission from the …rm) early exit from the labor force. I also study the implications of time inconsistency for an issue-by-issue voting equilibrium à la Shepsle in which voters determine simoultaneously the size and the degree of redistribution of the pension system. We show that in the hyperbolic voting game the equilibrium level of the Bismarkian part in the pension formula is not only lower than the planner’s preferred one, but also lower than the value that would emerge in a model with exponential preferences. JEL Classi…cation: A12, D91, E21, H55, J64 Keywords: Hyperbolic Discounting, Majority Voting, Redistribution, Retirement Age, Saving Behaviour. I wish to thank Helmuth Cremer, Georges Casamatta, Philippe de Donder, Paola Profeta and Marie Louise Leroux for very helpful suggestions. I bene…t from the comments of conference participants in Marseille and Budapest. The usual disclaimers apply. yAddress: GREMAQ, Université de Toulouse 1, 21 Allée de Brienne, 31000 Toulouse, France. E-mail: [email protected]