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Individuals often report that they regret not having saved more for retirement. This fact raises concerns about the financial security of retirees and about the adequacy of traditional economic models in making predictions that are consistent with regret about having saved too little for retirement. We provide an overview of four discounted utility models and examine their implications for the optimal level of retirement savings. All of these models exhibit dynamically consistent decision making, and some also feature backward discounting in order to generate regret about past saving decisions. In our preferred parameterization with both forward and backward discounting, a 66 year old at retirement will consider the optimal level of retirement savings to be almost twice as large as what was actually saved, even though actual saving decisions are dynamically consistent across the entire life-cycle. Compared to a model setting with fixed retirement, adding choice over retirement timing compounds the regret that individuals experience about past saving decisions. [ABSTRACT FROM AUTHOR]

Nearly all life-cycle models adopt Yaari's (1965) assumption that individuals know the survival probabilities that they face. Given that an individual's exact survival probabilities are likely unknown, we explore the implications of relaxing this assumption. If there is no annuity market, then the welfare cost of survival ambiguity is large and regressive. Ambiguity neutral individuals would pay as much as 1% of total lifetime consumption for immediate resolution of ambiguity and the bottom income quintile is 4 times worse off than the top quintile. Alternatively, with the availability of competitive annuity contracts, survival ambiguity is welfare improving because it allows competitive insurance companies to pool risk across survival types. Even though Social Security and annuities share some properties, Social Security does not help to hedge survival ambiguity. [ABSTRACT FROM AUTHOR]

Highlights • The number of times a choice is made in dynamic settings has welfare implications. • Commitment yields Pareto gains if the number of choices exceeds a low threshold. • Typical behavioral welfare analysis may align with a multiself Pareto criterion. Abstract The standard approach to welfare analysis under dynamically inconsistent preferences is to assume that the welfare of an individual is maximized if he can commit to his initial goal. We study a potential rationale for such welfare analysis. In some prominent, well-studied examples with intertemporal tradeoffs (like the choice between investing in a project now or later, doing an unpleasant task now or procrastinating it until later, and eating a cake), we find that the commitment allocation can multiself Pareto dominate the non-cooperative equilibrium allocation if the number of time-dated selves exceeds a low threshold. While a common concern with behavioral welfare analysis is that the later selves of an individual are unfairly hurt as a result of committing the individual to his initial goal, our findings indicate that this concern may be more relevant for settings where the number of sequential choices is very low. [ABSTRACT FROM AUTHOR]

Abstract: Contrary to the usual presumption that welfare in markets is maximized if consumers behave rationally, we show in a two-period overlapping generations model that there always exists an irrational consumption rule that can weakly improve upon the lifecycle/permanent-income rule in general equilibrium. The market-clearing mechanism introduces a pecuniary externality that individual rational households do not consider when making decisions but a publically shared rule of thumb can exploit. For typical calibrations, the improvement of the welfare of irrational households is robust to the introduction of rational agents. Although transitions to the optimal irrational steady state are not Pareto improving, transitions do exist that will improve a Pareto social welfare function with a sufficiently small generational discount rate. Generalizing to a more realistic lifecycle model, we find that the Save More Tomorrow™ (SMarT) Plan, if properly parameterized, can confer higher lifetime utility than the permanent-income rule. [Copyright &y& Elsevier]