In a nationally representative sample, we predict retirement savings using survey-based elicitations of exponential-growth bias (EGB) and present bias (PB). We find that EGB, the tendency to neglect compounding, and PB, the tendency to value the present over the future, are highly significant and economically meaningful predictors of retirement savings. These relationships hold controlling for cognitive ability, financial literacy, and a rich set of demographic controls. We address measurement error as a potential confound and explore mechanisms through which these biases may operate. Back of the envelope calculations suggest that eliminating EGB and PB would increase retirement savings by approximately 12%. (JEL D91, D14).
Bibliographical noteFunding Information:
∗The authors are grateful to Tania Gutsche and Bart Orriens as well as the staff at the American Life Panel for their assistance with fielding this study. They gratefully acknowledge financial support provided by the TIAA Institute and the Pension Research Council/Boettner Center of the Wharton School at the University of Pennsylvania. This research was also supported by the U.S. Social Security Administration through grant number RRC08098400-07 to the National Bureau of Economic Research as part of the SSA Retirement Research Consortium. Additional support was provided by the National Institute on Aging of the National Institutes of Health under grant number R01AG020717 and the Social Security Administration for the UAS data collection. Kir-ill Demtchouk, Paula Gablenz, Dominika Jaworski, Garrett Thoelen, and Wenjie Zhang provided exceptional research assistance. The authors also thank John Beshears, Jeff Brown, Leandro Carvalho, David Laibson, Annamaria Lusardi, Erzo Luttmer, Olivia Mitchell, Changcheng Song, Wesley Yin, and seminar participants at USC, RAND, North Carolina State University, and the NBER Summer Institute for helpful comments. The findings and conclusions expressed are solely those of the authors and do not represent the views of NIH, SSA, any agency of the Federal Government, the NBER, or any other institution with which the authors are affiliated.