Overconfidence, Knowledge of the Retirement Income System, and Retirement Planning

Previous research shows that the level of confidence in one’s financial ability is important for decision-making, especially in the realm of retirement planning. We expand on this literature by using survey responses to objective and subjective measures of financial literacy and retirement knowledge. We find that even though overconfident individuals are more likely to state that they have a retirement plan, they are less likely to have registered retirement savings, and when they do, they hold lower balances. Our findings highlight a potential mechanism in which overconfidence in one’s knowledge of the retirement system raises expected income replacement rates, which—consistent with a standard consumption–saving model—reduces private saving. Overconfident individuals also have biased inflation perceptions but take fewer protective actions to mitigate the effect of inflation. Finally, we find that overconfident individuals decrease their scores with repeated participation in different waves of the survey. These results suggest that calibrating confidence about one’s knowledge of the retirement system and of macroeconomic factors may be important for improving private retirement saving.