As the financial crisis and its aftershocks roll on, vigorous discussion continues about how America’s retirees, whose needs are more and more met by defined contribution plans like 401(k)s and 403(b)s, will be able to fund their retirement. Considerable hopes have been pinned on encouraging retirees to roll their savings into annuities.
The insurer Allianz (AZ) based a set of discussions on this topic by leading advocates of behavioral finance. Organized and edited by Shlomo Benartzi of UCLA with contributions from colleagues at American and British universities, the report included some interesting suggestions. In sum, they argue that because people have a difficult time making good financial decisions for themselves, plans should be designed to “nudge” them, as Richard Thaler and Cass Sunstein of the University of Chicago and Obama’s regulatory brain trust would have it, into making better decisions.
Many of the suggestions advanced are likely uncontroversial: If you present an annuity as a consumption option (“paying $650 monthly for life”), people are more likely to select it than if you present it as an investment option (“returning $650 monthly for life”). Other suggestions will go down much less smoothly. For example, David Laibson of Harvard argues that cognitive functioning declines precipitously across an aging population as the incidence of dementia rises. His research found that the quality of decisions “started declining at 53 and continued to diminish thereafter.” Logically, then, governments should nudge retirement plan providers to encourage people to irrevocably allocate a portion of their retirement assets to a fixed annuity before their ability to make optimal decisions becomes likely to trend downhill.
This is not easy to say, and will prove much more easily said than done. At the end of the day, there’s a lot of tension in the streets these days about the government’s perceived encroachments on
