Retirement Savings: A Tale of Decisions and Defaults

47 Pages Posted: 24 Aug 2014 Last revised: 17 Jan 2016

See all articles by Loretti Dobrescu

Loretti Dobrescu

University of New South Wales, School of Economics

Xiaodong Fan

Monash University - Department of Economics

Hazel Bateman

UNSW Sydney, CEPAR

Ben Newell

University of New South Wales (UNSW)

Andreas Ortmann

UNSW Australia Business School, School of Economics

Susan Thorp

University of Sydney Business School; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 22, 2014

Abstract

We examine the behavior of members of an industry-wide pension fund to assess both the prevalence of defaults and their impact on retirement savings. Our empirical investigations show that preferences, demographic characteristics and labor mobility matter greatly when it comes to the low active plan choice (or high defaulting) and overall level of pension bene ts. Using a structural dynamic life-cycle model, we then evaluate the ability of these empirically motivated factors to explain retirement savings patterns. In our model, individuals decide how much to save in a setting that combines an irreversible automatic enrolment with an active decision regime. After automatic enrolment, there is an initial choice between two pension plans (de fined benefi t vs. defi ned contribution), and then members decide (possibly by default) their voluntary contributions and type of investment allocation. We estimate the model using the simulated method of moments on administrative data from a large Australian pension fund. Our results show that default settings strongly influence wealth accumulation. Such settings are also highly persistent, both over time and across decisions. Overall, our findings suggest that if defaults (particularly the irreversible ones) are not carefully designed, retirement savings can be severely a ffected.

Keywords: pension defaults, retirement savings, method of moments

JEL Classification: H8, J26, J32

Suggested Citation

Dobrescu, Loretti Isabella and Fan, Xiaodong and Bateman, Hazel and Newell, Ben and Ortmann, Andreas and Thorp, Susan, Retirement Savings: A Tale of Decisions and Defaults (August 22, 2014). Available at SSRN: https://ssrn.com/abstract=2485189 or http://dx.doi.org/10.2139/ssrn.2485189

Loretti Isabella Dobrescu (Contact Author)

University of New South Wales, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Xiaodong Fan

Monash University - Department of Economics ( email )

Australia

Hazel Bateman

UNSW Sydney, CEPAR ( email )

High Street
Sydney, NSW 2052
Australia

Ben Newell

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Andreas Ortmann

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Susan Thorp

University of Sydney Business School ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 6354 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

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