The Effects of Myopia on Pension Decisions

Recent pensions policy debate in the United Kingdom has emphasised the role of behavioural myopia in justifying state involvement in retirement provision (e.g. Pensions Commission, 2005, pp. 68-69, and op.cit.). In this regard, it appears that public debate has gotten slightly ahead of the economic literature, as there currently exist very few studies that consider the empirical support for myopia on field data, or the practical implications of myopia for behavioural responses to policy alternatives. As a consequence, it is not possible to say how far myopia creates a need for publicly sponsored pensions, or whether a particular pension scheme is well suited to the needs of myopic individuals. This study explores how the long-run behavioural and welfare effects of a Defined Contribution (DC) pension scheme depend upon the extent of decision making myopia. The analysis is based upon estimates for a structural model of savings and labour supply on the assumption of quasi-hyperbolic discounting, and is framed around the National Employment Savings Trust (NEST) accounts that will be introduced in the UK from 2012.