Rational Inattention and Retirement Puzzles
Jamie Hentall MacCuish
Papers from arXiv.org
I present evidence incorporating costly thought solves three puzzles in the retirement literature. The first puzzle is, given incentives, the extent of bunching of labour market exits at legislated state pension ages (SPA) seems incompatible with rational expectations. Adding to the evidence for this puzzle, I include an empirical analysis focusing on whether liquidity constraints can explain this bunching and find they cannot. The nature of this puzzle is clarified by exploring a life-cycle model with rational agents that matches aggregate profiles. This model succeeds in matching aggregates by overestimating the impact of the SPA on poorer individuals whilst underestimating its impact on wealthier people. The second puzzle is people are often mistaken about their own pension provisions. Concerning the second puzzle, I incorporate rational inattention to the SPA into the aforementioned life-cycle model, allowing for mistaken beliefs. To the best of my knowledge, this paper is the first not only to incorporate rational inattention into a life-cycle model but also to assess a rationally inattentive model against non-experimental individual choice data. This facilitates another important contribution: discipling the cost of attention with subjective belief data. Preliminary results indicate rational inattention improves the aggregate fit and better matches the response of participation to the SPA across the wealth distribution, hence offering a resolution to the first puzzle. The third puzzle is despite actuarially advantageous options to defer receipt of pension benefits, take up is extremely low. An extension of the model generates an explanation of this last puzzle: the actuarial calculations implying deferral is preferable ignore the utility cost of tracking your pension which can be avoided by claiming. These puzzles are researched in the context of the reform to the UK female SPA.
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