LESSONS FROM BEHAVIORAL ECONOMICS FOR PROMOTING RETIREMENT INCOME SECURITY

Transcription

1 LESSONS FROM BEHAVIORAL ECONOMICS FOR PROMOTING RETIREMENT INCOME SECURITY Brigitte Madrian Harvard University Retirement Research Consortium Annual Conference, Washington DC August 2, 2018

2 What is Behavioral Economics? Behavioral economics incorporates insights from economics and other behaviorally oriented disciplines including psychology, sociology, anthropology, and cognitive neuroscience, to enrich standard economic models in ways that improve our ability to understand and predict human behavior, market outcomes, and public policy.

3 What is Behavioral Economics? Traditional Economics Behavioral Economics

4 Successfully Planning for and Executing Retirement is Hard

5 Complicated Problem: Many Choices to Make Where to save? IRA? 401k? HSA? Real Estate? How to save? Before tax? Roth? DB vs. DC? How MUCH to save? How to invest? Stock? Bonds? Gold? Bitcoin? Whether to save? When to retire? When/How to draw down assets? Inflation-protection? Survivors benefit? How to annuitize? Inflation-protection? Survivors benefit? Whether to annuitize? When to claim SS? 62? 65? FRA?

6 Successfully Planning for and Executing Retirement is Hard Complicated Problem Many choices to make Many options to choose from Uncertainty about the future Difficult Choice Context Limited financial literacy Limits to learning from experience

7 Complexity Procrastination

8 401(k) Participation Rate EXAMPLE: Savings Plan Participation and the Size of the Investment Menu in 401(k) plans 100% 80% 60% 40% 20% Each additional 10 funds in the investment menu is associated with a participation rate that is about 2 percentage points lower Number of Funds Offered 60 Number of Funds Source: Iyengar, Huberman and Jiang (2004)

9 Fraction of New Participants Making an Active Choice EXAMPLE : Active Choice and Investment Choice in the Swedish Premium Pension Plan 9 70% 60% 50% 40% As the number of investment options in the Swedish Premium Pension Plan has increased, the fraction of participants making and active investment election has fallen 30% 20% 10% 0% funds +Publicity 625 funds 664 funds >750 funds Close to 1,000 funds

10 EXAMPLE : DC Plan Options and Plan Participation in the Public Sector Source: NAGDCA Perspectives in Practice Survey Report, 2017

11 Complexity Attempts to Simplify

12 Fraction of employees EXAMPLE: Savings Plan Contributions 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Source: Choi, Laibson, Madrian and Metrick (2006) Year-End Contribution Rate No match

13 Fraction of employees EXAMPLE: Savings Plan Contributions No Match: Spikes at 5%, 10%, 15% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Source: Choi, Laibson, Madrian and Metrick (2006) Year-End Contribution Rate No match

14 Fraction of employees EXAMPLE: Savings Plan Contributions 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Source: Choi, Laibson, Madrian and Metrick (2006) Year-End Contribution Rate No match Match (25% up to 4% of pay)

15 Fraction of employees EXAMPLE: Savings Plan Contributions No Match: Spikes at 5%, 10%, 15% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Source: Choi, Laibson, Madrian and Metrick (2006) Year-End Contribution Rate No match Match (25% up to 4% of pay)

16 Fraction of employees EXAMPLE: Savings Plan Contributions Match: spike at 4% match threshold No Match: Spikes at 5%, 10%, 15% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Source: Choi, Laibson, Madrian and Metrick (2006) Year-End Contribution Rate No match Match (25% up to 4% of pay)

17 EXAMPLE : Asset Allocation Focus on options that are easier to evaluate Give more weight to the familiar (home bias) Higher investment in local firms Higher investment in employer stock Lower investment in foreign firms Give more weight to the status quo/default option Automatic enrollment default asset allocation Employer match in employer stock Focus on options listed at the beginning the end Focus on the size of different categories as signals of how to invest

18 Proportion in the DC Plan EXAMPLE: DB vs. DC Plan Choice 100% 80% 60% 40% The default retirement plan type strongly influences whether employees are in a DB or a DC plan 20% Age Source: Goda and Manchester (2010) Default is the DC plan Default is the DB plan

19 Choice Architecture

20 Elements of Choice Architecture 20 Choice architecture The design of the environment and context in which choices are made Number of options Order of options Structure of options Framing of the options/the choice Process around the choice Timing of the choice Frequency of the choice Location of the choice

21 Choice Architecture: Opt-in vs. Opt-out 21 Opt-In Initial default: Save nothing Opt-Out Initial default: Save something Opt-in, Save something Do nothing, Save nothing Do nothing, Save something Opt-out Save nothing

22 Choice Architecture: Active Choice 22 Save Something Active Choice Required Choose Either Save Nothing

23 Choice Architecture: Provide a Simplified Option 23 To enroll in the Helpful Corporation Savings Plan, check below and return this form Yes, please enroll me in the Helpful Corporation Savings plan at a 5% contribution rate invested in a diversified target retirement date fund. Note: you may enroll with other contribution rate and investment options on-line at any time

24 The Choice Architecture Continuum 24 Opt-in Easy Opt-in Active Choice Opt-out Prohibit Mandate/ Require

25 Choice Architecture: Planning Aids Savings Plan Enrollment Planning Aid Outline steps to enroll Time for each step Tips Source: Keller, Keller and Lusardi

26 Choice Architecture: Preference Checklist At what age, between 62 and 70, would you prefer to start claiming your Social Security benefits?

27 Choice Architecture: Preference Checklist Source: Johnson, Appelt, Knoll and Westfall (2016). Preference Checklists: A Selective and Effective Choice Architecture for Retirement Decisions

28 Choice Architecture: Future Self Visualization

29 The Moment You ve Been Waiting For Face aged to 2047 with the app AgingBooth

30 Choice Architecture: Framing the Options What is the chance that you will live to age: 65? 75? 85? 95? Live to Die by What is the chance that you will die by age: 65? 75? 85? 95? Source: Payne et al. (2012) Life Expectancy as a Constructed Belief

31 Behaviorally Informed Approaches to Reduce Complexity and Improve Choice Outcomes Automatic Enrollment Differentiated default options Reduce number of options Make choice options comparable Provide a simple option Reminders Planning aids Preference checklist Framing of options Require an active choice Consolidated /simplified enrollment Exploit existing decision moments Exploit fresh start decision moments

32 The Choice Architecture Continuum 32 Savings Rate Opt-in Easy Opt-in Active Choice Opt-out Low High

33 The Choice Architecture Continuum 33 Social Security Claiming Age Younger Older

34 The Choice Architecture Continuum 34 Annuitization Rate 0% 100%

35 Behavioral Economics and Public Policy 35 What does an understanding of behavioral economics bring to the policy table? Additional motives for policy intervention New policy tools Ways in increase the effectiveness of traditional policy tools