Costly Attention and Retirement
Jamie Hentall-MacCuish
TL;DR
This paper tackles why misbeliefs about the State Pension Age ($SPA$) and costly information frictions can explain a sharp retirement response around SPA, a puzzle not fully captured by standard incentives. It develops a dynamic lifecycle model with rational inattention and persistent beliefs, allowing belief distributions to be a state variable and employing a general-purpose solution method for high-dimensional, history-dependent belief dynamics. Estimation with UK data (ELSA) shows that misbeliefs about $SPA$ predict retirement decisions and can account for a substantial portion of the excess employment drop; endogenizing information acquisition also improves fit relative to complete-information benchmarks. Policy experiments reveal that information letters informing individuals about the true $SPA$ can raise old-age employment by up to 15% and deliver net welfare gains, highlighting the potential of light-touch information interventions to improve labor-market outcomes while acknowledging the modest but nontrivial role of information frictions in shaping retirement behavior.
Abstract
In UK data, I document the prevalence of misbeliefs regarding the State Pension eligibility age (SPA) and their predictivity for retirement. Exploiting policy variation, I estimate a lifecycle model of retirement in which, motivated by patterns in belief data, rationally inattentive households learning about uncertain pension policy endogenously generates misbeliefs. Misbeliefs explain 51% of the excessive (given financial incentives) drop in employment at SPA when constrained to replicate the belief data patterns and completely explain it when not. To achieve this, I develop a solution method for dynamic rational inattention models with persistent beliefs. Costly attention makes the SPA up to 15% less effective at increasing old-age employment. Hence, information letters improve welfare and increase employment.