FACULTY SPOTLIGHT: AN INTERVIEW WITH DR. GOPI SHAH GODA
Should retirement, which in many instances is claiming Social Security and leaving the workforce, be the end goal for individuals entering the workforce?
So I think the definition of retirement does need to change or be modified as time goes on. I think that the idea that you kind of work for a set amount of time and then have a full retirement, you know, going forward, may not be the best division of work and leisure over someone’s lifetime. I think the other thing is that often times people believe that they need to claim Social Security at the same time that they leave the workforce. And that may not—that’s never actually been true, that you have to do both at the same time. And thinking about those two decisions as separate decisions instead of one joint decision, I think, could also help make people flow into retirement in different ways than they have in the past. So, yeah I think that retirement as an end-goal can make sense in terms of taking some of the leisure as kind of in one—one big chunk at the end of your life. But that there are other models that could also work in terms of gradual retirement, phased retirement, and other things like that.
Continuing on the theme of end goals and the retirement of future generations, what do you think the future of retirement will look like? Will the traditional definitions, and composition, of retired Americans change significantly? How should we prepare?
So this is a saying that I borrow from John Shoven—another faculty affiliate at the center—but he has long stated that the idea that you can support a 20-year retirement with 30 years of work is—is outdated. And can’t continue. It’s just not sustainable. So as lifespans increase, then if retirements start at the same age, then retirements just get longer and longer. And I think the idea that we can continue to support a longer and longer retirement with—without changing the length of work is unreasonable going forward. I think some amount of that extra lifespan has to either—has to be split between work and retirement in some way that can lead to a more sustainable path for retirement. I think again, if part of retirement is supplemented by either partial work, which it is, I think, increasingly, and it’s perhaps pushed a little farther out, I think that retirement still can exist. But I think the current, you know the current mindset of retiring at a particular age, and that age as being fixed over time, is perhaps unreasonable.
Do you believe there should be a mandatory class—in either high school or college—that educates students on the basics of financial security and the importance of savings? Your research indicates that offering knowledge of saving led to better overall planning for the future. How might this be successfully implemented?
So I do think that financial education can start very young. The best ways to do that can vary based on, you know, the age of the people involved. My work has focused on workplace education about retirement savings, and the impact that contributing during one’s work life can have on sort of your future retirement income, and sort of explaining to people the tie between current contributions and future retirement income. But I do think that starting in, say high school or college—or perhaps even earlier—can sort of lead to a change in the mindset of how people think about saving for retirement and just think about overall finances differently. So not just saving for retirement, but also debt for instance, and how that impacts someone’s overall financial picture. So until we kind of get a handle on debt, for instance, it’s hard to imagine that we can really change the way that people think about retirement savings. But I think, you know, there’s a lot of hope. I think we saw big change in the way that people think about, say energy conservation. And a lot of that grew out of efforts aimed at, you know, children really, in terms of recycling and things like that. So I think that there’s a lot of hope in terms of the way that we can potentially train younger individuals to think about saving in a more holistic way that could have impacts on saving for the future.
In your research you discovered that reducing two psychological tendencies—present bias and exponential growth-bias—would lead to an increase in overall retirement savings. How do you and other scholars and researchers anticipate reducing these tendencies? Who is most at risk to succumb to these psychological tendencies?
Yeah, so in some of the research that I have done, we’ve found a pretty big association between whether someone is exponentially growth biased or present biased with their overall level of retirement wealth accumulated. And exponential growth bias is essentially the idea that people may underestimate the level of exponential growth going into the future, and lead them to potentially under-save if they sort of misunderstand this tie between how much I save now and how much you’ll accumulate in the future. Present bias is sort of a technical way to describe the idea of procrastination. So if you are able to measure someone’s procrastination tendencies, it seems that people who show more procrastination tendencies tend to also have lower levels of retirement wealth accumulated.
So in ongoing work, we’re trying to think about interventions that can sort of address both of these psychological tendencies, and see if they can help people overcome these tendencies. So the idea for exponential growth bias is to provide people with easy-to-use tools that allow them to understand their contributions and the tie between those contributions and retirement income. And for present bias, we also want to explain the cost of delaying those contributions into the future. So the idea is, if you tell people about how much more you would have to contribute if you started five years from now to reach a certain goal rather than today, that that might sort of impact those who are more—have these procrastination tendencies to start saving today rather that in the future. So what we hope to do is look at the impacts of these kinds of interventions in a random—randomized control trial, and also see whether they have differential impacts among those who before the start of our study, exhibited some tendencies toward exponential growth bias or present bias, respectively.
One thing that is interesting that we found from our previous research is that these two tendencies are not so highly correlated with a lot of the other things, that a lot of—the other observable characteristics that we can look at. So it’s not that there is a particular demographic that seems to be very likely to exhibit either exponential growth bias or present bias. It seems that these characteristics are—are sort of uncorrelated with a lot of things like gender, race, ethnicity, income, education, in a way that makes it hard to detect if you don’t have a way to sort of measure exponential growth bias. And so what we’re hoping is that these kinds of interventions can really target those who are exponentially growth biased or present biased in ways that can improve sort of overall saving outcomes.
Your research showed that after age 60, there are disincentives to remain in the labor force. However, with the average lifespan increasing, people are both wanting and needing to stay employed. What are the implications of the aforementioned finding, considering people are going to work for more years now than ever?
So I think there’s a strong case to make for policy interventions that can keep a lot of the systems like Social Security or disability insurance at the same level of generosity that they are now, but sort of tilt the incentives so that they favor people who work longer careers rather than people who work shorter careers. So in the Social Security system right now, once you work 35 years, your additional years of earnings don’t increase your benefit by nearly as much as say the 33rd, and 34th, and 35th year of earnings. And so one way to change that would be to either extend that 35 to something like 40 and extend the amount of time that your earnings sort of count towards your future benefits. And other ways to do that would be to change the way the formula sort of computes benefits for people with shorter careers in a way that provides more incentive for people to work longer. So I think that despite the fact that most of the policy attention for these programs is focused on ways to address the actuarial short fall, I think there are a lot of other policies that might be, ought to be considered, if there’s any kind of reform package to make the incentives more in line with people working longer and extending their working life. And I think there are a lot of possibilities of doing that within the existing framework just by, you know, tweaking few aspects of the program. That could be beneficial.
Currently, millennials have a debt 5 times higher than college graduates from fifteen years ago; will they and future generations have the means to invest in a stable retirement?
So I agree that debt for current generations of college graduates is higher than it used to be, and it’s—it’s something that probably needs to be addressed before you can really think about saving for retirement. So it doesn’t make sense for people to save for retirement if they have an existing amount of debt, and, you know, student debt is typically not terribly high interest rates, but credit card interests rates are very high. And if—it would be very—it seems like it would be a mistake for someone to sort of put money in a 401(k) account if they’re not paying down their debt. On the flip side, if they don’t put money in their 401(k) account, they might be foregoing some match from their employer, and, their other tax benefits doing that. And so, you know, addressing debt is really important. I think it’ll be increasingly important as we think about financial security for future generations. And I think educating people about the returns to saving in their 401(k) might provide some incentives to tackle the debt earlier rather than later.