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September 2017

Simplifying Choices in Defined Contribution Retirement Plan Design: A Case Study

By Donald B. Keim (University of Pennsylvania) & Olivia S. Mitchell (University of Pennsylvania; National Bureau of Economic Research) The growth and popularity of defined contribution pensions, along with the government’s increasing attention to retirement plan costs and investment choices provided, make it important to understand how people select their retirement plan investments. This paper shows how employees in a large firm altered their fund allocations when the employer streamlined its pension fund menu and deleted nearly half of the...

Using Behavioral Science to Increase Retirement Savings

By Andrew Fertig, Jaclyn Lefkowitz & Alissa Fishbane We all deserve a dignified retirement, yet for many of us saving enough remains an obscure, unrealized goal. In an ideal world, planning for our retirement would begin with our first job, continue throughout our working years, and end in sufficient savings for a comfortable future. This pathway may be possible for the few among us with employer-provided pensions, where someone else handles all the planning and saving. Yet trends in the retirement...

The Economic Importance of Financial Literacy: Theory and Evidence

By Annamaria Lusardi & Olivia S. Mitchell In this paper, we undertake an assessment of the rapidly growing body of research on financial literacy. We start with an overview of theoretical research which casts financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little)...

Borrowing on the Wrong Credit Card: Evidence from Mexico

By Alejandro Ponce (World Justice Project), Enrique Seira (Banco de México; ITAM) & Guillermo Zamarripa (FUNDEF, Mexico) We study how consumers allocate debt across credit cards they already hold using new data on credit card activity for a representative sample of consumers with two homogeneous cards in Mexico. We find that relative prices are a very weak predictor of the allocation of debt, purchases, and payments. On average, consumers pay 31 % above their minimum financing cost. Evidence on cross-card...

Drawing Down Retirement Savings – Do Pensions, Taxes and Government Transfers Matter Much for Optimal Decisions?

By Bonnie-Jeanne MacDonald (Independent), Richard J. Morrison (Independent), Marvin Avery (Human Resources and Skills Development), Lars Osberg (Dalhousie University) This paper examines the importance of pensions (employment and social security), taxes and government transfers for alternative retirement savings drawdown strategies, based on Canadian evidence. Using as examples single elderly Canadians at the 10th, median and 90th percentiles of the income distribution, we use a lifetime utility framework to evaluate an illustrative set of six popular drawdown strategies. Our longitudinal dynamic...

Does Financial Education Impact Financial Literacy and Financial Behavior, and If so, When?

By Tim Kaiser (German Institute for Economic Research (DIW Berlin); University of Kiel) and Lukas Menkhoff (German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin) In a meta-analysis of 126 impact evaluation studies, we find that financial education significantly impacts financial behavior and, to an even larger extent, financial literacy. These results also hold for the subsample of randomized experiments (RCTs). However, intervention impacts are highly heterogeneous: Financial education is less effective for lowincome clients as well as...

Debt and Financial Vulnerability on the Verge of Retirement

By Annamaria Lusardi, Olivia S. Mitchell & Noemi Oggero We analyze older individuals’ debt and financial vulnerability using data from the Health and Retirement Study (HRS) and the National Financial Capability Study (NFCS). Specifically, in the HRS we examine three different cohorts (individuals age 56–61) in 1992, 2004, and 2010 to evaluate cross-cohort changes in debt over time. We also use two waves of the NFCS (2012 and 2015) to gain additional insights into debt management and older individuals’ capacity...

August 2017

Self-Awareness, Financial Advice and Retirement Savings Decisions

By Anders Anderson (Swedish House of Finance) & David T. Robinson (Fuqua School of Business,) Using a financial literacy survey of Swedish pension investors matched to actual retirement savings decisions, we break respondents into three groups: those who are financially literate, those who mistakenly believe they are financially literate, and those who know that they are not. Investors with mistaken beliefs are more likely to work with mass-market advisors who steer them into high-fee funds. They underperform as a result....

The State of Public Pension Funding: Are Government Employee Plans Back on Track?

By Andrew G. Biggs (American Enterprise Institute) The public-sector pension industry is claiming a comeback from losses suffered during the Great Recession. But this recovery is greatly exaggerated: even years past the end of the recession, most pension sponsors are unable to their full annual contributions, and pensions are taking as much investment risk as ever. The first step to effective pension reforms is an honest, accurate view of the costs and risks that public plans impose on government budgets...

The Macroeconomic Impact of Fertility Changes in an Aging Population

By Neha Bairoliya, Ray Miller (Harvard University) & Akshar Saxena (Harvard University - T.H. Chan School of Public Health) We assess the impact of continued low fertility in China, versus a rebound in fertility due to the relaxation of the one child policy, on demographic and macroeconomic outcomes in a dynamic general equilibrium framework. We use a rich model of human capital investment, public health insurance, pensions, private savings, and intra-family transfers to support the consumption of young and elderly...