Three Essays on the Behavioural Economics of Saving for Retirement

Abstract

This thesis comprises three chapters that investigate, from a behavioural economics perspective, how individuals prepare financially for retirement. In Chapter 1, I investigate whether a savings 'nudge' is a viable mechanism to help people overcome knowledge barriers associated with saving for retirement. Using administrative tax records from Canada, I begin by estimating whether a nudge in workplace pensions increases net savings or induces workers to reduce contributions in other accounts. I find that a $1 increase in employer contributions crowds out other savings by $0.50. Hence, a nudge raises savings on average but many workers actively respond to it, which leads me to consider underlying heterogeneity in more detail. Specifically, I examine the effects of education on savings adjustments to a nudge and savings behaviour, using compulsory schooling reforms for identification. I find that workers with low education save inadequately for retirement on their own but benefit from a nudge by remaining passive, whereas those with high education are forward-looking and respond to the distortion by re-optimizing savings across accounts. These results indicate that a nudge likely increases consumer welfare in practice. In Chapter 2, I analyze the welfare implications of savings nudges when agents face subjective uncertainty about how to prepare adequately for retirement, but can mitigate this risk through endogenous information acquisition. I show that whether an optimal nudge increases or decreases individuals' savings levels depends on whether they initially under- or over-save due to their subjective uncertainty. Moreover, policies targeting human capital formation are a viable substitute for nudging, a result that policy-makers should consider when deciding on socially efficient programs for encouraging individuals to save. In Chapter 3, I examine the effect of withholding taxes on pre-retirement withdrawals from retirement savings account. Specifically, I estimate the elasticity of withdrawals to the net-of-withholding tax rate to be 1.5 for prime-aged savers. This finding suggests withholding taxes discourage pre-retirement withdrawals, serving as a de facto savings commitment device. Hence, individuals sometimes struggle to save adequately for retirement for reasons that are not well-explained by rational agency. I show that theories of present-biased preferences provide a better explanation.