Income as the Outcome: How to Broaden the Narrow Framing of U.S. Retirement Policy

Abstract

This article provides a brief review of behavioral economics research on annuitization. It applies the lessons learned from this literature to examine how public policy toward defined contribution plans has narrowly framed the conversation about retirement in a manner that may discourage the provision of lifetime income. It then discusses a number of policy changes that could be made to reframe the conversation to focus on retirement income security rather than wealth accumulation.

A Comparative Analysis of Financial Professionals’ Perception of the Level of Graduating Business Student Retirement Planning Familiarity, Motivation, and Preparedness

“…A nascent area of research that is relevant to this article is the application of behavioral economic theory to increase retirement savings (Thaler and Benartzi, ; Thaler and Sunstein, ), improve the spending decisions of retirees by overcoming the “annuity puzzle” (Blake and Boardman, ), and shift the focus of U.S. retirement policy from wealth accumulation to retirement income security (Brown, ). Thaler and Benartzi () suggest that most household retirement savings decisions are not made as economists would, and that the life‐cycle theory of savings (Ando and Modigliani, ) of optimization of periodic consumption and savings decisions is beyond the ability of most individuals due to the complexity of the problem and lack of self‐control.…”

“…Blake and Boardman () build on Thaler and Sunstein's SMART plan idea that exploits behavioral traits to nudge households to increase retirement savings by applying behavioral economics to nudge human retirees into making optimal retirement income choices and overcome the “annuity puzzle.” The authors identify a set of behavioral issues that impact retirees and develop a retirement expenditure plan (SPEEDOMETER) to optimize lifetime income. Lastly, Brown () argues that U.S. public polices narrowly frame the retirement paradigm to focus on wealth accumulation, rather than retirement income, resulting in workers/households underestimating income needs and therefore underinsuring against longevity risk. He discusses policy changes that would mitigate the underannuitization problem and lead to more optimal levels of guaranteed retirement income via annuitization.…”

“…The authors identify a set of behavioral issues that impact retirees and develop a retirement expenditure plan (SPEEDOMETER) to optimize lifetime income. Lastly, Brown (2014) argues that U.S. public polices narrowly frame the retirement paradigm to focus on wealth accumulation, rather than retirement income, resulting in workers/households underestimating income needs and therefore underinsuring against longevity risk. He discusses policy changes that would mitigate the underannuitization problem and lead to more optimal levels of guaranteed retirement income via annuitization.…”

Narrow Framing and Retirement Savings Decisions

“…Gottlieb and Smetters () showed how narrow framing fundamentally influences the design of life insurance policies and demonstrated a model of narrow framing where consumers do not fully account for their need for future liquidity when purchasing insurance. Furthermore, Brown () argued that US retirement policy has been “narrowly framed” to focus on saving and wealth accumulation, rather than more broadly framing the issue in terms of providing sustainable retirement income security (e.g., annuities).…”

“…In addition to a lack of resources, financial illiteracy, lack of financial skills and information, heuristics and biases, and lack of self‐control have been discussed as explanations for low retirement savings amounts (Benartzi and Thaler ; Howard and Yazdipour ; Knoll ; Lusardi and Mitchell ). Recent studies suggest the importance of “narrow framing” in explaining individual differences in retirement investment decisions and participation in long‐term care insurance (Benartzi and Thaler ; Brown ; Brown et al ; Gottlieb and Mitchell ). Narrow framing can be defined as a behavioral bias that occurs when people neglect the association of a present problem with other existing problems (Gottlieb and Mitchell ; Kahneman ; Kahneman and Lovallo ).…”