Improving Retirement Savings by Alleviating Behavioral Biases with Financial Literacy

Abstract

Lack of savings for retirement is a major issue, especially in soon-to-be ageing societies. Using a dataset from the American Life Panel (ALP) fielded by Goda et al. (2019), I investigate the role of financial literacy in alleviating the detrimental effects of present bias and exponential growth bias on retirement savings. I first examine the relationship of these biases on the retirement savings. Consistent with the previous studies, these findings suggest that individuals with these biases tend to save less for their retirement. However, I also find that financially literate individuals are less affected by present bias, and the effect from present bias is insignificant among the most literate ones. Moreover, better financial literacy is associated with a more accurate perception of exponential growth, which stimulates retirement savings.