The role of financial literacy, pension benefits valuation and present bias in retirement preparedness within a defined contribution pension framework

摘要

This thesis consists of three essays that analyse retirement planning and preferences in Chile. Its focus is empirical, and it is based on an extremely rich database for Chile, the Social Protection Survey. This survey is a nationally representative sample of the Chilean population and includes about 14,000 individual responses. We use the latest wave of the survey available which was fielded in 2009.The first essay (Chapter 2) undertakes a rigorous analysis of financial literacy in Chile to understand to what extent those that have higher levels of financial literacy are also better positioned to face retirement, leveraging timely and adequate retirement planning. We use a multinomial logit model to analyse the impact of financial literacy upon retirement planning, and we also explore the panel nature of the data to disentangle potential reverse causality issues. The results show that financial literacy and retirement planning are extremely low in Chile, but we are able to find a causal relationship between financial literacy and self-reported measures of retirement planning. This essay also contributes to a better understanding of the importance of financial literacy globally, complementing the Financial Literacy Around the World project.The second essay (Chapter 3) focuses on better understanding individuals' preferences around safety and generosity of retirement benefit. Using contingent valuation (CV) methods based on the random utility model we estimate (via a random effect probit model) respondents' willingness to pay (WTP) to alter the design of a hypothetical, but realistic, pension benefit. Our results indicate a large subjective valuation of guarantees, as projected annuity payments of a pension contribution equal to the median WTP for upgrading benefits are much larger than the actual pension increment proposed in the valuation experiment.The third essay (Chapter 4) expands the work of Hastings & Mitchell (2011) and analyses the relationship between individuals' impatience levels and retirement adequacy as well as the determinants of subjective discount rates in Chile. Using a one-time experiment on impatience, we find that Chileans respond to incentives to delay gratification, but rewards need to be almost 50 percent higher than current pay-offs to persuade people to delay gratification. This translates into discount rates that are at the high end of the international evidence. Moreover, we also show a positive association between patience and retirement adequacy for both employees and retirees. The combination of these findings is signalling that incentives and rewards that can change individuals' time preferences and intertemporal consumption patterns are likely to positively affect retirement income later on in Chile.Overall, the findings of the thesis combine to suggest that improvements in financial literacy through investments in financial education are important to upgrade retirement incomes in Chile. But, on their own, education and knowledge will not be sufficient to generate savings choices that will deliver these desired outcomes, nor will they be able to provide the improvements in retirement security that this research shows Chileans place so much value in. Chilean policy will need to consider the need for a more widespread access to retirement guarantees as well as the desirability of providing incentives to induce choices about retirement saving likely to lead to worthwhile retirement income improvements. However, our estimates indicate that these incentives will need to be substantial.