Multiple Myopias, Multiple Selves, and the Under-Saving Problem

Abstract

In both public policy debate and the academic literature, there is widespread, though not universal, agreement that millions of Americans are saving too little for their own retirements. If this is true, we could potentially increase such individuals’ welfare through the adoption of policies that resulted in their saving more. A key dilemma, however, is that, unless one understands why people are under-saving, it is hard to evaluate the likely responses to or merits of a given policy.Possible explanations for systematic under-saving include at least the following: (1) naive myopia, (2) sophisticated or self-aware myopia, (3) procrastination, or putting off any active decision because deciding is difficult or stressful, (4) mistake aversion, or not wanting to risk regret of an “active” decision that turns out poorly, and (5) acting as if one had multiple selves with distinct utility functions, causing decisions to depend on which is dominant at a given time.These causal accounts differ predictively, with regard to how they suggest people subject to them would respond to a given policy. They also differ diagnostically, with regard to whether the increased saving induced would be by the “right” people (i.e., those whom we believe are under-saving). Yet they can be hard to tell apart in practice. What is more, the same individual may be subject to several at once, or to alternative ones at different times.The alternative explanations for systematic under-saving can have very differing implications for such issues in U.S. public policy debate as the following:1) Should income tax benefits for retirement saving be reduced or even repealed?2) Should the U.S. federal income tax be partly or fully replaced by a consumption tax?3) Should “nudges” such as automatic enrollment be used to increase employee participation in employer-run retirement savings plans?4) Should Social Security retirement benefits be scaled back for long-term fiscal plans, or alternatively expanded?5) Should the design of Social Security be changed, such as by making the relationship between payroll taxes paid and benefits received both actually and optically clearer?The paper’s aim is not to offer definite answers to any of these questions, but simply to improve understanding of the likely relationship between leading theoretical explanations for under-saving and the above issues.