Behavioral Economics and the Retirement Savings Crisis
Abstract
Many countries are facing a retirement savings crisis. In the United States, for example, the fraction of workers at risk of having inadequate funds to maintain their lifestyle through retirement is estimated to have increased from 31% to 53% from 1983 to 2010 (1). Roughly half of U.S. employees (78 million) have no access to retirement plans at their workplace (2). Fortunately, there are solutions to these problems. We simply have to change the choice architecture of retirement plans by utilizing the findings of behavioral economics research (3) and make such plans available to all workers. We describe a large-scale field demonstration of the potential impact of such research-based changes in how we save.
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References and Notes
1
Munnell A. H., Webb A., Golub-Sass F. N., The national retirement risk index: An update (Center for Retirement Research at Boston College, Chestnut Hill, MA, 2012).
2
Munnell A. H., Fraenkel R. C., Hurwitz J., The pension coverage problem in the private sector: An update (Center for Retirement Research at Boston College, Chestnut Hill, MA, 2012).
3
Thaler R. H., Sunstein C. R., Nudge: Improving Decisions About Health, Wealth, and Happiness (Yale Univ. Press, New Haven, CT, 2008).
4
Novy-Marx R., Rauh J., J. Finance 66, 1211 (2011).
5
Benartzi S., Lewin R., Save More Tomorrow: Practical Behavioral Finance Solutions to Improve 401(k) Plans (Penguin, New York, 2012).
6
Madrian B. C., Shea D. F., Q. J. Econ. 116, 1149 (2001).
7
Vanguard Group, How America Saves (Vanguard, Valley Forge, PA, 2012).
8
Thaler R. H., Benartzi S., J. Polit. Econ. 112, (suppl. 1), S164 (2004).
9
Kahneman D., Tversky A., Econometrica 47, 263 (1979).
10
Data provided by Aon Hewitt, which tends to focus on larger plans that are generally more innovative, so the numbers could be biased upward. By comparison, the Plan Sponsor Council of America reports in their 54th Annual Survey (19) that 46% of plans had automatic enrollment in 2011. Owing to confidentiality concerns, Aon Hewitt analyzed data on authors' behalf and only provided summary statistics displayed in the chart.
11
Pensions and Investments (2012); www.pionline.com/specialreports/dc-record-keepers/20120402.
12
According to 2010 Department of Labor data (20), the pensions and investments universe of plan providers covers more than 90% of all plan participants in the United States.
13
Firms shared data on condition of anonymity, so data are stripped of identifying information.
14
Plan Sponsor Council of America, 55th Annual Survey, 2012; www.psca.org/55th_survey.
15
At the authors' request, a large-plan administrator calculated a median income of $62K and average income of $93K for 1.8 million contributing participants in its plans, which suggests that our calculation may be conservative.
16
Chetty R., et al., Active vs. passive decisions and crowd-out in retirement savings accounts: Evidence from Denmark (NBER Working Paper No. 18565, National Bureau of Economic Research, Cambridge, MA, 2012).
17
Volpp K. G., et al., JAMA 300, 2631 (2008).
18
Volpp K. G., et al., Health Serv. Res. 8, 272 (2008).
19
Plan Sponsor Council of America, 54th Annual Survey, 2011; www.psca.org/54th-annual-survey.
20
U.S. Department of Labor, www.dol.gov/ebsa/PDF/2010pensionplanbulletin.PDF.
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Science
Volume 339 | Issue 6124
8 March 2013
8 March 2013
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Copyright © 2013, American Association for the Advancement of Science.
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Published in print: 8 March 2013
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