Mitchell, Olivia S
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Publication How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors(2018-08-12) Hastings, Justine S; Mitchell, Olivia STwo competing explanations for why consumers have trouble with financial decisions are gaining momentum. One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations such as computing compound interest, which could cause them to make suboptimal financial decisions. A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs. We use experimental evidence from Chile to explore how these factors appear related to poor financial decisions. Our results show that our measure of impatience is a strong predictor of wealth and investment in health. Financial literacy is also correlated with wealth though it appears to be a weaker predictor of sensitivity to framing in investment decisions. Policymakers interested in enhancing retirement wellbeing would do well to consider the importance of both factors.Publication Public Sector Pension Plans: Lessons and Challenges for the Twenty-First Century(2000-01-01) Hustead, Edwin C.; Mitchell, Olivia SPublication Planning and Financial Literacy: How Do Women Fare?(2007-08-01) Lusardi, Annamaria; Mitchell, Olivia SMany older US households have done little or no planning for retirement, and there is a substantial population that seems to undersave for retirement. Of particular concern is the relative position of older women, who are more vulnerable to old-age poverty due to their longer longevity. This paper uses data from a special module we devised on planning and financial literacy in the 2004 Health and Retirement Study. The evidence indicates that women display much lower levels of financial literacy than the older population as a whole. In addition, women who are less financially literate are also less likely to plan for retirement and be successful planners. These findings have important implications for policy and for programs aimed at fostering financial security at older ages.Publication Testing Methods to Enhance Longevity Awareness(2020-11-02) Hurwitz, Abigail; Mitchell, Olivia S; Sade, OrlyMany people have only a vague notion of the concept of life expectancy and the longevity risk they face at older ages, which in turn implies that they are likely to undersave for retirement. This paper employs an online experiment to investigate alternative ways to describe both life expectancy and longevity risk, with the goal of assessing whether these can raise peoples’ awareness of possible retirement shortfalls. We also evaluate whether providing this information promotes interest in saving activity and demand for longevity insurance products. We find that providing longevity risk information impacts respondents’ subjective survival probabilities, while simply describing average life expectancy does not. Yet providing life expectancy or longevity information significantly affects financial decisions, mostly regarding annuitization. Interestingly, we also find that merely prompting people to think about financial decisions changes their perceptions regarding subjective survival probabilities.Publication Complexity as a Barrier to Annuitization: Do Consumers Know How to Value Annuities?(2013-03-01) Brown, Jeffrey R; Kapteyn, Arie; Luttmer, Erzo FP; Mitchell, Olivia SThis paper provides experimental evidence that individuals have difficulty valuing annuities, and this difficulty – rather than a preference for lump sums – can help explain observed low levels of annuity purchases. Although the median price at which people are willing to sell an annuity is close to median actuarial values, this masks notable heterogeneity in responses including substantial numbers of respondents whose responses are difficult to reconcile with optimizing behavior under any reasonable parameter assumptions. We also discover that people are willing to pay substantially less to buy a larger annuity, a result not due to liquidity constraints or endowment effects. Strikingly, we also learn that individual responses to the buy versus sell decisions are negatively correlated, an effect that is stronger for the less financially sophisticated. Our findings are consistent with boundedly rational consumers who adopt a “buy low, sell high” heuristic when faced with a complex trade-off. Moreover, at the margin, subjective valuations vary nearly one-for-one with actuarial values but are uncorrelated with utility-based measures designed to measure the insurance value of annuities. This supports the hypothesis that people use simplifying heuristics to think about annuities, rather than engaging in optimizing behavior. Results also underscore the difficulty of explaining the cross-sectional variation in annuity valuations using standard empirical models. Our findings raise doubt about whether most consumers can make optimal decisions about annuitization.Publication Optimal Social Security Claiming Behavior under Lump Sum Incentives: Theory and Evidence(2023-01-13) Maurer, Raimond; Mitchell, Olivia S; Rogalla, Ralph; Schimetschek, TatjanaPeople who delay claiming Social Security receive higher lifelong benefits upon retirement. We survey individuals on their willingness to delay claiming later, if they could receive a lump sum in lieu of a higher annuity payment. Using a moment-matching approach, we calibrate a lifecycle model tracking observed claiming patterns under current rules and predict optimal claiming outcomes under the lump sum approach. Our model correctly predicts that early claimers under current rules would delay claiming most when offered actuarially fair lump sums, and for lump sums worth 87% as much, claiming ages would still be higher than at present.Publication Asset Rich and Cash Poor: Retirement Provision and Housing Policy in Singapore(2002-11-01) McCarthy, David; Mitchell, Olivia S; Piggott, JohnNational defined contribution pension systems have long been a mainstay of retirement income in Asia. One of the oldest and best known of these systems is the Singaporean Central Provident Fund, a mandatory retirement scheme managed by the central government for almost a half-century. With required contribution rates that have ranged up to 50%, this program has powerfully shaped asset accumulation patterns and housing portfolios. This paper explores how the structure and design of the Singaporean retirement and housing schemes influence wealth levels and asset mix at retirement. Our model indicates that outcomes rest critically on the interlinked national retirement and housing programs. We show that policies to enhance one program may boost retirement replacement rates but can also lower total wealth in unexpected ways. The lessons we draw may serve as guidance for other countries constructing a national defined contribution retirement system.Publication Understanding Financial Vulnerability Among Asians, Blacks, and Hispanics in the United States(2023-03-21) Hasler, Andrea; Lusardi, Annamaria; Mitchell, Olivia S; Sconti, AlessiaThe COVID-19 crisis has brought to light the deeply rooted financial struggles that many people face in America, and it also exacerbated racial inequality. In particular, minority communities have been disproportionately impacted by the pandemic in many ways, making them ideal targets for efforts to promote financial well-being. This paper examines the financial vulnerability of Asians, Blacks, and Hispanics in the United States, along with potential drivers, using data from the 2021 National Financial Capability Study and the 2022 TIAA Institute-GFLEC Personal Finance Index. We analyze indicators measuring financial vulnerability across three topics of personal finances: retirement planning, indebtedness, and financial resilience. We find that more Blacks and Hispanics reported being financially vulnerable, compared to Whites and Asians. The main contributing factors to the racial and ethnic gaps in financial vulnerability are single parenthood, youth, lack of savings and wealth, too much debt, income shocks, costly money management practices, and low financial literacy levels. The empirical analysis is complemented by roundtable discussions with experts and thought leaders from National CAPACD and UnidosUS. Our research findings and recommendations can be used to develop more inclusive and tailored financial education programs.Publication Labor Market Uncertainty and Pension System Performance(2009-09-01) Mitchell, Olivia S; Turner, John AThe financial market crisis has prompted policymakers to devote substantial attention to ways in which capital market risks shape pension performance, but few analysts have asked how shocks to human capital shape retirement wellbeing. Yet human capital risks due to fluctuations in labor earnings, employment volatility, and survival, can have a profound influence on pension accumulations and payouts. This paper reviews existing studies and offers a framework to think about how human capital risk can influence pension outcomes. We conclude with thoughts on how future analysts can better assess sensitivity of pension plan outcomes to a labor income uncertainty.Publication Financial Regret at Older Ages and Longevity Awareness(2022-12-06) Hurwitz, Abigail; Mitchell, Olivia SOlder people often express regret about financial decisions made earlier in life that left them susceptible to old-age insecurity. Prior work has explored one outcome, saving regret, or peoples’ expressed wish that they had saved more earlier in life. The present paper extends attention to five additional areas regarding financial decisions, examining whether older Americans also regret not having insured better, claimed benefits and quit working too early, and becoming financially dependent on others. Using a controlled randomized experiment conducted on 1,764 respondents age 50+ in the Health and Retirement Study, we show that providing people objective longevity information does alter their self-reported financial regret. Specifically, giving people information about objective survival probabilities more than doubled regret expressed about not having purchased long term care, and it also boosted their regret by 2.4 times for not having purchased lifetime income. We conclude that information provision can be a potent, as well as cost-effective, method of alerting people to retirement risk.