Face Retirement

According to a recent article in the Wall Street Journal, Merrill Edge have launched Face Retirement, a social tool that ages a picture of consumers, enabling them to see how they will look in the future.

"In a Stanford University experiment, people who saw age-enhanced images of themselves were more likely to save more for retirement, compared to those who weren't exposed to their future selves," said Alok Prasad, head of Merrill Edge. "Face Retirement is designed to minimize that gap by giving consumers a preview of their future self, encouraging them to take control of long-term financial planning."

According to a recent CNBC article, individuals who interacted with a happier version of their future self saved even more for retirement. The academic research related to this intervention was published last year in the Journal of Marketing Research.

Funding your IRA

Just in the interests of cultural understanding, I should probably explain to US readers of the blog why it is that Irish people start laughing when the US pension system is described to them. I have a document in front of me that tells me that funding an IRA is a great way to save for retirement. You can even choose between the traditional IRA or a new type of IRA. I think after reading this literature for so long the urge to laugh every time I hear people talk about this has died down but only a little bit. The IRA to most Americans is, of course, the Individual Retirement Accounts that many people use to save for retirement. For most Irish people the IRA (Irish Republican Army) is a republican paramilitary organisation mainly based in the North of Ireland. So with very little imagination, you can have a great laugh reading glossy brochures warning you what might happen if you don't pay your IRA contributions or helping you choose the IRA that is right for you or looking through the IRA websites of large financial companies. And all the time remembering that no matter how old you are it's never too late to start making your IRA contributions!

NBER Paper: Behavioral Economics and Public Sector Pension Plans

Behavioral Economics Perspectives on Public Sector Pension Plans

John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian NBER Working Paper No. 16728 Issued in January 2011 We describe the pension plan features of the states and the largest cities and counties in the U.S. Unlike in the private sector, defined benefit (DB) pensions are still the norm in the public sector. However, a few jurisdictions have shifted towards defined contribution (DC) plans as their primary savings plan, and fiscal pressures are likely to generate more movement in this direction. Holding fixed a public employee‘s work and salary history, we show that DB retirement income replacement ratios vary greatly across jurisdictions. This creates large variation in workers‘ need to save for retirement in other accounts. There is also substantial heterogeneity across jurisdictions in the savings generated in primary DC plans because of differences in the level of mandatory employer and employee contributions. One notable difference between public and private sector DC plans is that public sector primary DC plans are characterized by required employee or employer contributions (or both), whereas private sector plans largely feature voluntary employee contributions that are supplemented by an employer match. We conclude by applying lessons from savings behavior in private sector savings plans to the design of public sector plans.

Irish Green Paper on pensions considers "auto-enrolment"

More than 380 submissions have been received by the Department of Social Affairs as part of the consultation process for the Irish Green Paper on Pensions. The key issues raised included pension reform options such as mandatory or auto-enrolment approaches, retirement age, and eligibility for the State pension and public sector pensions. More information on this is available here.

In this Business & Finance article from last year, myself and Liam Delaney discuss the interaction between economics and psychology with an application to retirement savings. The idea of "auto-enrolment" was evaluated by Madrian and O'Shea in their 2001 QJE paper: "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior". (401k plans are retirement savings schemes). Madrian and O'Shea found that participation is substantially higher under automatic enrolment and that a substantial proportion of people retain the default amount in the scheme even though this default amount varied among participants. They argue that automatic enrolment succeeds due to the inertia of potential program participants, and also perhaps due to the fact that employees interpret the default options as investment advice.

Also mentioned in the B&F article is the idea of "saving more tomorrow". The "Save More Tomorrow" initiative is outlined by Thaler and Benartzi in the Journal of Political Economy (2004). The idea behind this scheme is that people discount the future in a hyperbolic fashion. So Thaler and Benartzi offered people a scheme where they save a proportion of their future earnings. The idea is that people will not "feel the pain" so much if the saving is taken out of future salary and also if the saving does not result in any decline in living standards even over the short term. Thaler and Benartzi found that:
(1) a high proportion (78%) of those offered the plan joined;
(2) the vast majority of those enrolled in the plan (80%) remained in it through the fourth pay raise; and
(3) the average saving rates for programme participants increased from 3.5% to 13.6% over the course of 40 months

Finally, the B&F article also mentions a recent Wharton school paper that reported on "Quick Enrolment". This paper ("Reducing the Complexity Costs of 401(k) Participation Through Quick Enrollment") is written by Choi, Laibson and Madrian. Despite this initiative essentially being a simplification of the 401(k) scheme rather than a major change in its monetary value, participation in this programme tripled 401 (k) participation rates among new employees at one company.

So there is an evidence base for how "auto-enrolment", "saving more tomorrow" and "quick enrolment" are beneficial for encouraging retirement savings. An OECD papaer from last year is also worth looking at: Tapia, W. and J. Yermo (2007): "Implications of Behavioural Economics for Mandatory Individual Account Pension Systems". This was mentioned by Liam on the blog earlier this year: here.