behavioral economics and retirement planning

Excerpts from a WSJ interview on "behavioral economics" with Richard Thaler (in promoting his recent book in the field, "Misbehaving")-- as applied to the challenges of retirement planning...

Retirement savings is...a prototypical behavioral-economics problem because saving for retirement is cognitively hard (figuring out how much to save) and requires self-control...two of the most important things that are left out of traditional economics.

There are four ingredients to a good defined-contribution plan. The first is automatic enrollment. Second, we need automatic escalation, or “save more tomorrow,” to help employees increase their savings rates over time. Third, we need good default investment vehicles. And, finally, we need to stop encouraging employees to load up on company stock. For employees, if those things are available, take advantage of them. If they are not, you have to invent your own.

We’ve made good progress on the accumulation phase of retirement saving, but the decumulation phase hasn’t received nearly enough attention. This is unfortunate because the spending-down phase is even harder for individuals to solve, especially since so few people elect to annuitize their wealth.

Most economists, including me, agree that longevity insurance would make sense for a lot of people. Buy a policy that starts when you’re 75 or 80. But for reasons that would make an interesting behavioral-economics study, those policies have not gotten much attention from consumers.