What Will My Account Really Be Worth? An Experiment on Exponential Growth Bias and Retirement Saving Gopi Shah Goda Colleen Flaherty Manchester Stanford University and NBER University of Minnesota Aaron J. Sojourner University of Minnesota and IZA This research has been supported by the Social Security Administration through the Financial Literacy Center, the TIAA-CREF Institute, and the Carlson School of Management. Goda, Manchester, and Sojourner (2012) What Will My Account Really Be Worth? May 2012 1 / 91
Introduction Overview Question: Is saving behavior affected by projections of how changes in contributions will impact retirement income? Method: Field experiment with ≈ 17,000 employees at Univ. of MN Findings: Individuals sent income projections and general retirement plan materials increased their level of saving Employees sent income projections were significantly more likely to: engage in retirement planning, be certain about expected retirement income, and report greater satisfaction with their financial condition. Effect moderated by high rates of time preference, liquidity constraints, and procrastination. Effect sensitive to framing Goda, Manchester, and Sojourner (2012) What Will My Account Really Be Worth? May 2012 2 / 91
Introduction Motivation: Policy Percent with pensions of different types among Americans with pensions (Buessing & Soto 2006) 1980 2003 Change Only Defined Benefit (DB) 60 10 -83% Only Defined Contribution (DC) 17 62 +265% Both 23 28 +22% DC plans require individuals to make accumulation/decumulation decisions and bear risk navigate mapping from contribution rate to target retirement income Lifetime Income Disclosure Act (S. 2832) : would require DC plans to project lifetime income supported by current retirement savings Goda, Manchester, and Sojourner (2012) What Will My Account Really Be Worth? May 2012 3 / 91
Introduction Motivation Evidence for bounded rationality in savings Financial literacy is not widespread (Lusardi & Mitchell 2007) Powerful effect of defaults (Madrian & Shea 2001, Beshears et al. 2006, Mitchell et al. 2009, Goda & Manchester 2010) Saving decisions affected by behavioral factors (Duflo & Saez 2003; Thaler & Benartzi 2004; Choi et al. 2004; Beshears et al. 2006; Choi et al. 2006; Bernheim et al. 2011) Exponential growth bias (Wagenaar & Sagaria 1975; Einstein & Hoch 2007; Stango & Zinman 2009; Song 2012) Contributions of this study First study measuring impact of projections on savings behavior Investigate influence of projection assumptions Follow-up survey provides deeper insights Goda, Manchester, and Sojourner (2012) What Will My Account Really Be Worth? May 2012 4 / 91
Introduction Overview of Talk Simple model of optimal saving Experimental design Results effects on saving behavior effects on saving process and attitudes heterogeneity: for what kinds of people are effects larger how do incidental aspects of projections matter Compare study sample to national sample (FINRA) Conclusions Goda, Manchester, and Sojourner (2012) What Will My Account Really Be Worth? May 2012 5 / 91
Model Optimal Saving Problem Worker’s Saving Decision : Given A 1 initial wealth Y 1 working income, and (degenerate) beliefs about: k years until retirement R gross investment return p annuity price Choose: C 1 how much to consume while working (period 1) A 2 how much to save for retirement (period 2) Goda, Manchester, and Sojourner (2012) What Will My Account Really Be Worth? May 2012 6 / 91
Model Modeling Accumulation and Decumulation Bias We introduce bias in individuals’ understanding of how savings map to retirement income Accumulation bias ( θ ): assets A grow according to f ( R , k , A ; θ ) = R k θ A (Stango & Zinman 2010) Unbiased ⇔ θ = 1; under-estimate exponential returns if θ < 1 Literature suggests θ < 1 Decumulation bias ( g ( θ ) ): proportional bias in annuity price for individual with accumulation bias θ ; g ( θ ) = p θ / p Unbiased ⇔ g ( θ ) = 1; under-estimate rate of annuitization if g ( θ ) < 1 g (1) = 1 and g ′ ( θ ) > 0 Goda, Manchester, and Sojourner (2012) What Will My Account Really Be Worth? May 2012 7 / 91
Model Optimal Saving Problem with Accumulation and Decumulation Bias Individuals choose A 2 to maximize U ( C 1 ) + β k U ( C 2 ) subject to: A 2 + C 1 = Y 1 + A 1 g ( θ ) pR k θ A 2 C 2 = The first-order condition for optimal saving is 2 )[ β R θ ] k A ∗ : U ′ ( C ∗ 1 ) = g ( θ ) pU ′ ( C ∗ 2 Goda, Manchester, and Sojourner (2012) What Will My Account Really Be Worth? May 2012 8 / 91
Model Comparative Statics U ′ ( C ∗ 2 ) U ′ ( C ∗ 2 ) Define ǫ ( θ ) ≡ − 2 = − 2 ) . 2 ) g ( θ ) pR k θ A ∗ U ′′ ( C ∗ U ′′ ( C ∗ 2 )( C ∗ Proposition 1: Given U ′′ < 0, β > 0, and R > 1, � ∂ A ∗ � 2 sign [ ǫ ( θ ) − 1] = sign ∂θ Then ǫ = Elasticity of Intertemporal Substitution (EIS) which governs how savings responds to beliefs about returns. Implications: Assuming our intervention reduced the amount of bias in θ and θ < 1 pre-intervention, observing an increase (decrease) in saving implies ǫ > 1 ( ǫ < 1). Goda, Manchester, and Sojourner (2012) What Will My Account Really Be Worth? May 2012 9 / 91
Experimental Design Experimental Context Setting: University of Minnesota, October 2010 - May 2011 Measure contributions to a Voluntary Retirement Plan (VRP): Two choices (Optional Retirement Plan, 457 Plan) $16,500 maximum annual tax-deferred contribution Range of investment options Most employees also participate in mandatory retirement plans: DB pension for civil service and non-faculty bargaining unit employees DC plan for faculty, academic professionals and administrators Nearly all employees also participate in Social Security. Goda, Manchester, and Sojourner (2012) What Will My Account Really Be Worth? May 2012 10 / 91
Experimental Design Design of Treatments (T2) Treatment Group: Control Planning Balance Income General information on saving for re- � � � tirement and signing up for VRP Customized information regarding � � conversion of hypothetical additional contributions to additional account balance at retirement Customized information regarding � conversion of hypothetical additional contributions to additional annual in- come in retirement List of Materials Goda, Manchester, and Sojourner (2012) What Will My Account Really Be Worth? May 2012 11 / 91
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