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Background for the study

Nowadays the Italian Social Security spends about 15% of gross domestic product on public
pensions due to a continuous ageing of the population without an appropriate employment rate,
which would supply the necessary public contribution. Such high expenditure can no longer be
sustained; for this reason several reforms in social security have been implemented, since the
Nineties, by different governments. Recent reforms have reduced the pension spending but the
replacement rate, that is the ratio of an individual's pension and his income in a given time period,
for the future retirees is going to decrease dramatically: the Ministry of Labour and Social Security
foresee that, in 2050, the replacement rate will be lower than 50%. On the other hand, the
reforms have planned, for the employees, particular ways of saving that would increase their
replacement rate: every worker can decided to put aside part of his current salary in particular
pension funds (most of which are defined contribution retirement plans) with the intent to build
up a private pension that will increase the public one when the worker stops working. Savings
aimed at private pensions is a matter of the greatest importance, for this reason the reforms
permit several concessions in contribution and tax incentives.
Saving behaviour was the field of study of several economic theories developed by some of
the leading economists including John M. Keynes, Irving Fisher and Milton Friedman; but the most
influential theory of saving for retirement is, probably, The life-cycle savings hypothesis
developed by Modigliani and Ando in 1963. The model is both smart and simple: an individual is
assumed to calculate how much he is going to earn during his lifetime, work out how much he will

need during his retirement and then save the right amount for finance consumption after
retirement while he is still working.
According to this model and knowing the future of the Italian public pensions, it would be
expected that there is a high participation rate in pension funds but, actually, these are very
The standard economy theory seems to have some problems with real individuals
behaviour even if, as a guideline, the model is excellent: people are not capable of solving
complicated mathematical problems, they are not interested in future events and they havent the
willpower to implement relevant plans like a retirement plan. In other words, the standard theory
is about homo economicus, not homo sapiens. Therefore, what can lead homo sapiens to change
their saving for retirement behaviour?
The choice to enrol in a retirement fund is largely influenced by two classes of factors.
Some, such as legislation, an appropriate range of pension funds, or tax relief concerns all workers,
while others are, however, subjective and strictly relevant of the individual; some examples
among many others are financial resources, risk aversion or financial literacy.
According to previous research, among the main determinants of participation and
contributions to defined contribution pension plans are considered risk aversion (Tversky and
Kaheneman, 1992), herding behaviour (Bikhchandani et al., 1992; Banerjee, 1992; Elison and
Fudenberg, 1993; Duflo e Saez, 2002), time preference and hyperbolic discounting (Mischel e
Staub, 1965; Ainslie, 1992; Laibson 1997,1998), personal wealth (Poterba et al., 1996; Messori e
Scaffidi for Mefop, 2000) and financial literacy (Lusardi and Mitchell, 2005; Boeri and Zingales,
Using these arguments, in the dissertation I wrote for my MSc1 in 2009, I tried to test
whether these factors can influence the decisions of workers in Trentino, where all the employees
have the possibility to take part in a pension fund thanks to the presence of a regional retirement
fund: Laborfonds, the largest local closed fund in Italy in terms of number of members.
Using a simple probit model I studied the effects of several factors on the individuals
explicit will to enrol in a pension fund with the transfer of their severance pay accumulated by law

MSc in Banks, Enterprises and Financial Markets University of Trento, faculty of Economics. Thesis Title:
Determinanti delladesione ai fondi pensione, under the supervision of Professor Gianfranco Cerea.

(TFR). The set of independent variables was: herding behavior, financial literacy, risk tolerance,
gender, age, seniority, income and company size. The data were collected submitting a
questionnaire to a sample of 206 employees. The results showed the greatest influence was
financial literacy and herding behaviour; this is the most important factor and, according to
previous research (Duflo e Saez, 2002; Papke 2004), could play an important role in the
individuals saving behaviour.
The proposed research objectives

Despite the interesting results of the simple model used in my research for the MSc final
dissertation, the actuality and the importance of this argument justify a more thorough approach
to the problem and the participation in the doctoral programme would be an ideal opportunity to
continue and refine my research on the determinants of participation to pension funds.
There are several improvements and modifications that I think are interesting and

Increase the researchs scope

Firstly, it would be interesting to extend the research beyond regional borders to study the
situation in other Italian regions and compare the results with Trentino. Several factors, for
instance the lack of a territorial pension fund or lower confidence in the local government,
can completely distort the result. In addition, research that focuses not just on one but on
several determinants of participation are, nowadays, still an uncharted territory in Italy.


Introduction of new variables

Secondly, it could be appropriate to introduce new variables such as time preferences. In
long-term decisions, and retirement saving is one of them, self-control problems and
hyperbolic discount functions play an important role: the tendency to defer decisions (a
phenomenon known as time-inconsistent procrastination) leads to a distortion in the
evaluation of postponed events. (Laibson, 1997). Ventura (2003) has developed a simple
model that can measure savers time preferences. This could provide important
information about individuals preferences and could help to explain the workers low
participation rate in pension funds.


A new independent variable

Finally, having established what the factors are that lead to enrolling, a key question is if
the workers are saving enough for their future. Automatic enrolment, wanted by the Italian
legislator, has proven to be effective in increasing enrolment but it doesnt assure a perfect
retirement cover. Participants tend to stick with the default contribution rate, which could
be inappropriate and is typically quite low. In a study reported by Thaler and Sunstein
(2009) 68% of the participants in a defined-contribution savings plan said that their
savings rate is too low. In my survey only 30% declared increasing with personal savings
their TFR contribution.
How can workers be induced to save more? The ways that I would like to study are
essentially three. One of these concern the contributions tax structure: now the
contributions are income deductible but other solutions, such as tax allowance, according
to the OECD (2004) should be considered in order to increase the pension funds
attractiveness. Studying the investors reactions to tax structure changes could be a very
important topic.
The second way could be changes in real incentives. The disposition of the amount in the
pension funds is restricted to several conditions. These make this type of savings
unattractive compared to other forms of investment: again, more flexible access to
benefits for those who have stronger overall security positions (typically continuous
occupational profiles) would increase the attractiveness of a pension fund and a
consequent increase in their contribution.
In order to help workers increase their saving rates, the last option I would consider is a
program of automatic escalation of contributions developed by Thaler and Benartzi (2004),
called Save More Tomorrow (SMarT). This program seeks to overcome some problems of
human behaviour responsible for the low participation and contribution to pension funds.
SMarT invites savers to commit themselves in advance: their contribution rate increases at
every pay rise. Synchronizing pay rises and savings increases, doesnt cause any reduction
in the spending capacity of individuals and thus no immediate damage. In the pilot
experiment in a midsize firm, after three and a half years the workers savings rate, who
joined the SmarT program, had almost quadrupled and they will have significantly more
money available for retirement than their colleagues that didnt join the plan. Nowadays

many retirement-plan administrators have adopted the SmarT program: its my interest to
investigate if, programs like this, help Italian workers to construct a more stable retirement
As cited my aim in this Ph. D., which urges me to apply for the doctoral programme, is to
improve both myself and the research on the demand of private pensions, focusing on the
arguments presented in the previous paragraph with a particular attention to the principles of
behavioural economics. It is vital not to leave out of consideration the behavioural economics
topics because they can help to explain the difference between homo economicus and homo
sapiens behaviour. For this reason my preferred curricula is Behavioural Economics and

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