Choice architecture in pensions and retirement
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Peter Zwaneveld
This research program will analyse the impact of customization and freedom of choice in pensions and retirement on social welfare. For rational economists more freedom of choice is always better. However, empirical evidence and insights from behavioural economics suggest that choice architecture in pension plans could substantially impact the social welfare gain or losses. We focus on two aspects of choice architecture: choice limitation and individualized defaults. Choice limitation, striking the balance between paternalism and individual freedom, can prevent large utility losses due to suboptimal decisions. Individualized defaults assist participants in matching outcomes to personal circumstances. Both aspects exhibit indirect effects on decision making through implied endorsement.
This program focuses on the effect of choice architecture in pension plans on (1) retirement and (2) pension saving and investment. The effective retirement age has a large impact on adequacy of pension income during retirement and on the government budget. Sensible defaults and limited options for choice in pension accumulation, pension decumulation and investment assist participants in financial planning during the life cycle. The choice architecture can be set by the government, social partners and pension funds. The analysis also includes the impact on choice of personal characteristics such as life expectancy, health, risk attitudes, housing tenure, etc. This focus allows us to perform in-depth analysis.
