Planning and Saving for Retirement

Planning for retirement is difficult, but essential for future financial security. To formally analyse the interplay between planning and self-control, I introduce cognitive costs of formulating a plan into the two-system model of impulse control. The resulting possibility of rational inaction in pension choices allows to generate a range of robustly observed behaviours. In particular, non-savers are characterised by poor financial self-control, high cognitive costs, and/or low incomes. Automatic enrolment into private pensions raises participation (the `default option effect'), but its impact on aggregate saving remains ambiguous as some individuals are `forced' to save, while others become `discouraged' and adhere to possibly low default contribution rates. Due to the same mechanism, automatic enrolment reduces cross-agent variation in wealth accumulation. A numerical application of the model indicates that while automatic enrolment into private pensions can increase aggregate saving, its impact on welfare remains limited because age-independent contribution rates are inconsistent with the optimal life-cycle pattern of retirement saving. Importantly, the effects are highly heterogeneous across the income categories