The Role of Time Preferences and Exponential- Growth Bias in Retirement Savings Discussion by Melissa Knoll| CFPB Disclaimer: The views expressed are those of the speaker and do not necessarily reflect those of the Consumer Financial Protection Bureau or the United States.

2 Present Bias and Retirement Savings  Current paper shows how present bias can hinder retirement savings  Previous work in psychology and behavioral economics has demonstrated how PB can be exploited “for good”  Thaler and Benartzi’s (2004) “Save more tomorrow” (SMarT) plan Exploit present bias to get employees to pre-commit to saving from future raises  Beshears, Madrian, Choi, Laibson… defaults in 401(k) plans Employees don’t move away from the default—they may believe they will reallocate in the future, but never do

3 Present Bias and SS Retirement Benefit Claiming  Current paper talks about PB and financial outcomes, but PB may also be related to benefit claiming  Could have huge financial implications later in life  Prospective retirees have to choose between a larger benefit later or a smaller benefit now  Present bias could explain why many people want to claim as soon as possible Current paper estimates that 55% of sample is present-biased  Knoll et al. (2015) found that people who were already eligible to claim benefits preferred earlier claiming ages than people who were not yet eligible  People have intentions to delay claiming, but may actually claim when benefits are available now  EBRI consistently finds that expectations of retirement age and actual retirement age don’t match

4 Exponential Growth Bias and Retirement Savings  Current paper discusses how EGB can hinder retirement savings  Importantly, paper also shows that EGB can be debiased using visualization tools  Income treatment—additional retirement income stream  Balance treatment—additional balance at retirement  SSA attempted a similar visualization—results?

5 Self-Awareness and Overconfidence  Does self-awareness mitigate bias?  PB, yes if it leads you to pre-commit Retirement accounts are pre-commitment devices – Discourage impulsive behaviors through penalties Barriers to committing should be low – Those without employer-sponsored plans may find it difficult to save  EGB, yes if it leads you to seek or accept help (e.g., tool, advice) In general, those who are overconfident may be less likely to seek advice or use tools to help in financial decision making Tools used in study treatments are effective in reducing the bias – Shows promise for the use of tools in financial decision making – But how do we get overconfident people to use tools?

6 Suggestions for Next Steps  Provide more insight into policy implications  How do we get overconfident people to use tools? Assess uptake of tool by overconfident people How did tool use differ by degree of overconfidence?  Are there underlying characteristics of the tool that could be useful to explore further? Balance vs. annual income? Monthly income? Allow them to choose preferred display? Pre-populated rate of return vs. user’s estimate  How do we address heterogeneity when creating tools?