In Nudge Thaler and Sunstein motivate their Save More Tomorrow plan with the following unfortunate illustration:
Consider, for example, the case of Tony Snow, the former White House press secretary, who resigned at age fifty-two in 2007 to return to the private sector. He said his motivation for leaving was financial. "I ran out of money," he told reporters…Before serving as press secretary, Snow worked a much more lucrative gig as a Fox News Channel anchor. But he arrived at the White House not having learned Retirement 101 lessons. "Snow conceded: ‘As a matter of fact, I was even too dopey to get in on a 401(k).’
Sadly, Snow’s choices now look optimal. Ok, I know that may be in poor taste but let’s try to rescue this observation with some theorizing. Are we more likely to commit the error of saving too much or too little?
There are people who don’t save much because they have very low incomes, their behavior does not seem to be in error, especially when we take into consideration the various welfare programs that will cover people in their old age.
So let’s focus on people with moderate to high incomes. Thaler and Sunstein say that we are more likely to make errors when the benefits are upfront and the costs are delayed. Eating too much chocolate being a classic example. Ok, that suggests we may save too little.
T. and S. also argue that the less frequent a decision the more likely are errors. Frequency, however, cuts both ways – we only die once – so that’s a wash.
Over confidence and in particular the idea that we are special and will live a long life suggests the error is saving too much. Note that we also tend to think that our partner will be alive as well. My wife once asked me whether we were saving enough for "our" retirement. "Sure," I said, "don’t forget one of us will probably die before the other and I’m not saving for your future husband." "Why," she replied with a sigh, "can’t economists be more human?"
Availability bias probably also suggests we save too much – we see people who saved too little in the street but the ones who saved too much are dead and gone.
In theory, optimal saving equalizes the marginal utility of income across one’s lifetime – some programs like Kotlikoff’s ESPlanner attempt to calculate such an eqi-marginal utility flow and Kotlikoff’s finding is that a large fraction of Americans, some 40%, are saving too much. Kotlikoff’s program takes into account that we may need less wealth when we are old and retired (e.g. less transportation for work related reasons) but not that the marginal utility of wealth may be lower when we are old. (e.g. Money’s not so valuable if you don’t need it to or can’t use it to attract a mate.) Thus over-saving may be even more common than Kotlikoff suggests.
I do not know which error is more prevalent but if we are to be neither spendthrift nor miser we need to recognize both types of error.