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  4. Preliminary Program
  5. Behavioral Economics and Pension Design
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Behavioral Economics and Pension Design

Paper Session

Friday, Jan. 7, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: American Economic Association
  • Chair: Brigitte Madrian, Brigham Young University

Optimal Default Options: The Case for Opt-Out Minimization

B. Douglas Bernheim
,
Stanford University
Jonas Mueller Gastell
,
Stanford University

Abstract

This paper explores the desirability of opt-out minimization, a well-known and simple rule of thumb for setting default options such as passively selected contribution rates in employee-directed pension plans. Existing results suggest that this strategy is welfare-optimal only under highly restrictive assumptions. This paper dispenses with those assumptions and demonstrates far more generally that opt-out minimization is approximately optimal. The main results require only a small number of weak regularity conditions. We also conduct simulations to evaluate the accuracy of the approximation, as well as the robustness of our conclusions with respect to additional dimensions of heterogeneity. We conclude that opt-out minimization is not only practical, but also has a solid and general normative foundation.

Present Bias Causes and Then Dissipates Auto-Enrollment Savings Effects

John Beshears
,
Harvard Business School
James Choi
,
Yale University
David Laibson
,
Harvard University
Peter Maxted
,
University of California-Berkeley

Abstract

Auto features in defined contribution pension plans, like auto-enrollment, have a large short-run effect on participation and contribution rates. However, a growing body of evidence suggests that auto features may have only a modest average impact in the long run. We show that if households have present bias and naive beliefs, auto-enrollment is predicted to have a positive causal impact on savings in the defined contribution savings plan at the household's current employer. However, with sufficient present bias, that current/proximate savings will be partially or even fully dissipated before retirement. We provide sufficient conditions for partial and full reversal of the short-run savings effects of auto-enrollment.

Do State-Sponsored Retirement Plans Boost Retirement Saving?

John Chalmers
,
University of Oregon
Olivia S. Mitchell
,
University of Pennsylvania
Jonathan Reuter
,
Boston College
Mingli Zhong
,
Urban Institute

Abstract

Oregon recently launched the first automatic-enrollment retirement savings program for private-sector workers lacking access to other workplace retirement plans. We use administrative and survey data to show that the number of funded accounts and average account balance are both steadily increasing, and that the number of workers with pre-existing retirement accounts is likely small. We also show that OregonSaves disproportionately serves workers in low-wage, high-turnover industries, that participation rates are lower than in 401(k) plans with automatic enrollment, and that the most common reason that workers give for not participating in the program is a lack of disposable income.

Precautionary Liquidity and Retirement Saving

Marie Briere
,
Amundi, Paris-Dauphine University and Free University of Brussels
James Poterba
,
Massachusetts Institute of Technology
Ariane Szafarz
,
Free University of Brussels

Abstract

This paper employs administrative data from one of the largest plan providers in France -- data on 680,382 active employees at 1,610 firms -- to investigate the role of plan and default characteristics in affecting whether employees participate in the plan and whether they accept its default investment option. French employers have wide discretion in structuring employee saving plans. All plans must offer medium-term investments, which cannot be accessed for five years. Employers may also offer long-term investments that cannot be accessed until retirement. When plans include a long-term option, participation is lower than when the plan offers only more liquid medium term investments. The presence of a long-term saving option also reduces the take-up of the plan’s default investment allocation, which must include a long-term component. One interpretation of the findings, consistent with the theory of choice overload, is that some employees are unwilling to forego the liquidity of the medium-term option but find it costly to make an active election when they opt out of the default, and therefore choose not to participate in the plan at all. When employees have the opportunity to withdraw funds in connection with a hardship withdrawal, the withdrawal rate from long-term accounts exceeds that from their more liquid medium-term counterparts.

Discussant(s)
Patrick Warren
,
Clemson University
Laura Quinby
,
Boston College
Melinda Sandler Morrill
,
North Carolina State University
Julie Agnew
,
College of William and Mary
JEL Classifications
  • G4 - Behavioral Finance
  • J1 - Demographic Economics