AN EXPERIMENTAL TEST ON DYNAMIC CONSUMPTION AND LUMP-SUM PENSIONS1

This article examines the potential risks on consumption behavior of lump-sum payments in public pension systems. Lump-sum payments can be consumed too fast and generate an increase of poverty rates. We experimentally investigate retirement consumption behavior in an inter-temporal decision-making setting. Subjects make consumption and saving decisions in an environment with two central features: first, there exists a decreasing probability of survival; and second, in addition to the regular income they get while active, they receive a unique lump-sum payment when retired. The results of this paper indicate that in the vast majority of periods subjects over-save. Moving the lump-sum payment into earlier periods makes the effect eventually deeper: subjects adopt larger precautionary saving decisions.