Does Greater Complexity Reduce Retirement Adequacy? Evidence from the Survey of Consumer Finances, 1995-2007
Consumer Interests Annual, 2012 Forthcoming
14 Pages Posted: 12 Aug 2012
Date Written: 2012
Fudenberg’s (2006) model of bounded rationality posits that greater complexity should result in households being less likely to achieve rational outcomes. Some households have higher complexity in retirement planning because expected retirement income varies during retirement. Based on 1995 to 2007 Survey of Consumer Finances datasets, about 73% of households have more than one stage. When income stages are taken into account, the proportion of households with retirement adequacy overall increased from 44% in 1995 to 58% in 2007, and in each year the proportion was much lower than estimates ignoring income stages. The combined stage adequacy proportion ranges from 44% to 58% with stage partition. Our multivariate analysis shows that households with more than one stage are more likely to have an adequate retirement than households with only one stage, contrary to Fudenberg’s model, perhaps because of unmeasured differences in characteristics of households with multiple retirement stages. Controlling for other variables, retirement adequacy does not vary significantly during the 1995 to 2007 period.
Keywords: Bounded rationality, Survey of Consumer Finances, income stage, retirement adequacy
JEL Classification: D14, D91, G23, D83
Suggested Citation: Suggested Citation