The post retirement crisis is basically about outliving your assets, i.e.

living for a time

duration beyond which your assets can last for.
Firstly our aim is to better understand the factors which affect how savings happen and how
predictions can be made about future behaviours. Some of the factors which help us
understand as to how pension funds are beneficial are,
Pensions and Savings
In order to understand the concept of pensions and savings, consider a comparison between
two individuals, both having the same income and wealth, and both saving the same fraction
of their savings. Suppose however that one of them saves a certian portion of this saving in a
mandatory pension scheme. Standard models would suggest that savings would remain same
for both individuals, but this may not necessarily be the case because,
a) There are no psychic costs which will be involved in pension saving. Psychic costs
are social costs such as costs due to increased stress or costs due to reduced quality of
life, or search costs etc. The marginal costs for saving reduce, implying a greater
saving.
b) Normally savings are a percentage of the disposable income. When a fixed amount is
withdrawn as mandatory pension, the disposable income reduces, but still the savings
are maintained at the same percentage of disposable income. Therefore, net savings
(i.e. including both pension and percentage of disposable income) increases.
c) Discretionary saving and retirement savings are not perfect substitutes. Savings are
not treated directly as a straight transfer to future consumption.
The above factors showcase that total savings is higher for individuals with pension plans
as compared to ones without such plans.
Savings and Timing of Cash Flows
Another factor affecting total savings is the timing of cash flows. For example consider a
comparison is done between two individuals, one having an income of X every month
and another having an amount equal to (X/2) every month and 6X being paid at the end of
the year. Even though the total amount for a year is the same, the amount of savings made
by both of them will not be the same. The individual obtaining a bulk amount at the end
of the year is found to save more in comparison with the other.
Most individuals prefer to have their monthly inflow and outflow to roughly balance each
other. Mortgage payments, payments to various life insurance policies, contributions etc
are done on a monthly basis. Lesser monthly inflow tends to affect the outflow.
An alternate option to replicate monthly instalments is to deposit the bulk amount in a
bank and withdraw periodically and match the outflow as in the previous case. This
behaviour is however rarely seen and typically much of the bulk amount is saved.
Temptations to make expenditures during the year become lesser as the lesser monthly
salary makes the expenses seem beyond the available means. The bulk payment acts as an
external self control mechanism.
Each individuals saving pattern depends directly upon the shape of the income streams in
general. In the case of individuals who have incomes which are highly variable and
uncertain, the policy of saving a fixed percentage of disposable income is not applicable,

as in some months the income may be very low and in some months it may be extremely
high. In the case of individuals with decreasing future incomes, a tendency is to save a
higher portion of the present incomes and a much lower portion of the lower future
incomes. In both cases, a mandatory pension plan will most likely increase the amount of
savings in totality.
Complications in saving for retirement
Broadly, there are two types of saving plans
(1) Defined Benefit In this a fixed benefit is determined without any input from the
employee. Here, plan sponsor is responsible for providing the benefit. Factors which
determine the benefit are
(a) Salary history
(b) Duration of employment
(2) Defined Contribution This gives autonomy to the workers. They themselves
choose size of their retirement accounts. However, with this autonomy come three
types of decisions which workers have to contemplate and decide upon. These include

(a) Whether to participate

(b) How much to save
(c) How to invest
Last two decisions are the complicated ones because of longevity risk, investment
risk and other things as well.

Different type of Challenges

(1) There remains uncertainty about how long the retirement income should last because
longevity differs for every individual. Although the average life expectancy has
improved but nothing can be said definitively about how long a person would live and
chose the duration of the retirement plan accordingly.
(2) Investment risk is substantial. Since, saving for retirement is a long term process and
it has been found that on an average equity markets offer better returns as compared to
fixed income securities. Since, these retirements do not offer returns at par with, so
people tend to put their money into equities instead.

As per Employee Benefit Research Institutes survey, nearly 43 percent of the people
above the age of 25 have retirement savings of less than $10,000 and about 31% of
people do not have any retirement savings.

Despite retirement saving plans offering an attractive way for people to save money, along
with the other substantial incentives on offer, the participation rates towards these schemes is
substantially low. Some of the factors causing this are,
a) Natural tendency to maintain a position of status quo

Individuals have a natural tendency to continue on with their position of status quo.
Individuals find it challenging to shift from a position of not saving to joining and
contributing to these plans, which can be either defined benefit or defined
contribution plans
b) Complexity of the decision and choice avoidance
Contradictory to the common perception, greater the number of options available,
greater the complexity of decision making. Too many options prove to be a detriment
and discourage employees from enrolling onto any plan. This negative corelation
between participation rates and number of pension funds offered was observed in
various researches
c) Preference for payoffs which happen immediately
Savings for pension funds is basically a tradeoff between immediate and future
consumption. Research has observed that individuals tend to prefer immediate payoffs
and rewards. Therefore individuals tend to prefer immediate payoffs rather than going
in for a saving whose benefit will be derived in the future. An example of this
behaviour is the tendency to undertake activities like smoking and eating unhealthy
foods and foresaking the future healthcare costs that might occur. Similarly
individuals also tend to delay activities which result in an immediate cost.
Participating in a pension plan, results in less money being available for the future,
and the benefits are derived far into the future. Individuals who prefer immediate
rewards therefore procastinate pension fund investments.

By modeling the individual as an organization, the concept of self-control can be

incorporated in the theory of intertemporal choice. Here, we can effectively talk about the
agency problem between the manager and owner of a company. Similarly, at a particular
point of time, an individual can be thought of as a myopic doer as well as a farsighted
planner. Through this paper we would stress upon the implications of the agency model
because same technology is used by both the owner as well as the manager to mitigate the
problem created by the conflict.
We would start by looking at the example of Christmas Clubs. These clubs did not pay any
interest. They received deposits from each club every week from their members but the
withdrawal of money could only be done on 1 st December. Although these clubs were
dominated by interest bearing accounts but these clubs were very popular. They offered loans
at an interest rate of 9% with collateral (at 10% without collateral) when bank were giving
5% on deposits. Here, the individual could obviously borrow at a cheaper rate of 5% but still
these clubs were popular.
Now, we would analyse economic theory perspective upon our example of Christmas Clubs.
Stigler provides an analysis:
A desire to protect oneself against loss of willpower in future could be a possible reason for
this anomaly but this would not be a satisfactory reason because this would turn our utility
into a redundancy i.e. we could make up any reason for any irrational behaviour. So, limiting
ourselves to utility theory we can say that the opportunity cost of depositing money in a
Christmas Fund is the interest that can be earned by putting money in bank deposit. The cost
of buying willpower would increase if the rate of interest rises.

Helping employees to join retirement plan

There are different ways of helping employees to overcome their inertia in joining these
plans. Most of the retirement plans have been found to be using the opt-in approach.
Whenever an employee needs to opt into any plan, the have to communicate this to their firm,
their investment choice and how much percentage of income they want to contribute.

Obstacles

Potential Interventions

Decision avoidance & other Complexities

Simplification in enrolment process

Inertia

Requiring explicit actions from workers

Procrastination

Automatic ways of enrolment

What are the reasons people tend to save less for retirement?
When employees of a company get into a retirement plan, they tend to decide a contribution
rate as a percent of salary. But calculating optimal contribution percent is difficult which
requires reasonable estimations on future cash inflows, health condition, etc. But the reality is
that most people resort to using heuristics to determine the contribution rate. Some rule of
thumbs can be round numbers like multiples of 5, or a figure that increases employers
contribution rates. Some other problems that lead to sub-optimal or bad decisions are
improper or no planning, inertia problem and
a) Improper planning
Many surveys and research reports state that people barely spend time planning for retirement
savings. Because of this, they keep the contribution rate at the same level for many years.
Some people even take greater time in smartphone, laptop, etc. purchase decisions rather than
retirement planning.
b) Inertia
When the default contribution rate is some percent it tend to stay there even in case of
automatic enrollment in retirement planning programs which encourage employee
participation. Automatic registering in some plan and choosing a default rate leads to a false
perception that the contribution is sufficient for a secure retirement.
c) Low tangibility of future benefits
The short term implications of contributing extra to a retirement plan are quite tangible and
hence not preferred by employees. People prefer not giving up on todays consumption like
parties, expensive outings, etc. The advantages of increasing contribution to retirement funds,
which will be received after retirement, are not so tangible and hence difficult to understand.