Planning and saving for retirement

In this paper, I analyse the interplay between costly planning and imperfect self-control in the context of a dynamic retirement saving problem. For an exogenous planning horizon, poor self-control leads to fewer periods with positive savings and to under-accumulation of pension wealth. Consequently, an agent characterised by poor self-control postpones planning for retirement, or does not take action at all, if the cost of planning is high enough. The agent’s level of income emerges as another determinant of the planning decision, and thus the wealth-to-income ratio can be income dependent, even with CRRA preferences. Considering a mandatory pension scheme with rigid contribution and decumulation schedules, I demonstrate how the extent of crowding out of private savings and the associated welfare effects vary with the agent’s propensity to plan actively.