Knowledge, Information, and Retirement Saving Decisions: Evidence from a Large-Scale Intervention in Chile

All over the world, retirement income depends increasingly on individuals’ savings choices over their lifetime. While government-sponsored retirement schemes (like the U.S. social security system) provide a reasonable stream of resources for old age, middle- and high-income workers are expected to make their own additional savings arrangements, either through employer-sponsored pension plans, matching contribution schemes such as the 401(k) plans in the United States, or individual savings through tax-favored investment vehicles.¹

To adequately plan for retirement, individuals need information about their current situation, the different choices available to them, and some minimal mathematical and abstraction capabilities to properly process this information. There is growing concern, however, regarding the low level of financial literacy among the general population. The baby boomer generation does not seem to have accumulated sufficient financial wealth beyond housing, with particularly low asset levels for female-headed households.² Even if the lack of financial sophistication could be overcome by the use of retirement planning services, the existing evidence suggests that these services are rarely sought, and when they are, it is mostly by individuals with initially higher levels of financial literacy.³ Furthermore, individuals with less exposure to financial planning tend to make “wrong” choices: saving less than required in poorly diversified portfolios or not profiting from tax-favored instruments.⁴

In a defined-contribution scheme, the level of the benefit is not known beforehand, and individuals face uncertainty about how their current savings will translate into future benefits. In this setting, one key piece of information that individuals need to make active decisions to improve their retirement wealth is the pension level they are expected to receive given their current financial wealth and their historical saving behavior. Assuming that individuals can reasonably form an expectation of the income level they would like to receive in old age, the comparison between desired and projected income could induce them to save more, transfer their wealth into more conservative or aggressive portfolios, postpone retirement, or seek retirement planning advice. While it is always possible to make these adjustments, the effectiveness of these choices depends on the time horizon until retirement: while small changes when one is young can have a large impact on retirement, individuals with low asset levels can do little to improve their situation as they approach retirement age, except perhaps postpone their exit from the labor force.

In this article, we exploit a large-scale natural experiment to analyze the impact of a personalized pension projection (PPP), which was sent to practically all Chilean active dependent workers in July 2005, on their retirement saving behavior. The objective of this intervention was to simplify the information received by pension system members, to help them make better decisions. In essence, we compare the saving behavior of individuals during the first twelve months after they received the PPP with that of comparable individuals who were not sent this statement due to some specific administrative rules.

We use this analysis to address two different issues. First, if individuals were well aware of their current financial stance, receipt of this information should have no effect on their retirement-related saving behavior. Our analysis serves as a test of the full-information hypothesis. Second, the large scope of the intervention allows us to look at different subgroups of the population. As mentioned above, the age dimension is particularly important, since the possibility of correcting misalignments between expectations and projections depends crucially on the time horizon until retirement. The gender dimension is also important for the Chilean case, as the actuarial nature of the Chilean pension system tends to directly translate gender differences in the labor market into differences in their old age income: Chilean women tend to work less frequently, receive lower wages for a comparable job, retire earlier, and live longer.⁵ We also look for differential impacts among individuals with different income levels (since retirement-related voluntary savings are tax exempt, we would expect a higher effect on individuals with positive marginal tax rates, keeping...