Je Ne Regrette Rien? Time-inconsistent health behavior and retirement planning

In this paper, we examine the health and retirement outcomes of present-biased individuals who engage in time-inconsistent behavior and fail to follow through on plans to save more, invest more in their health, and reduce unhealthy consumption. For that purpose, we set up a health deficit model with hyperbolic discounting in which longevity and the disutility from work depends on health and the retirement decision depends on health, wealth, and the public pension system. We calibrate the model for Germany and show that inconsistent savings behavior tends to push the retirement age upward, while inconsistent health-related decisions lead to a downward adjustment. Which effect dominates is highly context specific. For example, rich persons and persons with little preference for unhealthy goods are predicted to retire later than planned, poor persons and persons with a strong preference for unhealthy goods retire earlier than planned. However, all individuals die earlier than expected and the loss of life due to inconsistent behavior depends on the strength of present-bias. We explore how the pension system affects the retirement decision and whether it could be designed to nudge individuals to adhere to their retirement plans.