Assessing the Rationality of Workers ’ Choice of Retirement Age and Saving Accumulation

This paper asks whether economists ’ model of fully rational decision makers can explain saving for retirement or the timing of retirement. Many non-economists are skeptical that workers make retirement decisions in the far-sighted and well-informed manner that “rationality ” seems to imply. Unlike other economic choices, which are repeated many times over the course of a worker’s life, the decision of when to retire is usually made only once. Workers are not given the opportunity to improve on decision making through constant repetition. The evidence on the financial soundness of workers ’ retirement choices is mixed. When polled about their preparations for retirement, large minorities of Americans acknowledge they have given no thought to the subject, have saved little or nothing in pension and other retirement accounts, and lack confidence they will be able to afford retirement. Many workers near retirement age are ignorant of the rules that will determine their pension benefits. Some economists and financial planners have found evidence that middle-aged and older workers face large saving shortfalls compared with the savings needed to retire at the typical retirement age. Empirical studies show that a substantial minority of workers experiences big drops in consumption after they retire, which appears to violate a basic implication of the life-cycle model