La Caca de Vaca

Economic theory generally assumes that people solve important prob- lems as economists would. The life cycle theory of saving is a good example. Households are assumed to want to smooth consumption over the life cycle and are expected to solve the relevant optimization prob- lem in each period before deciding how much to consume and how much to save. Actual household behavior might differ from this optimal plan for at least two reasons. First, the problem is a hard one, even for an economist, so households might fail to compute the correct savings rate. Second, even if the correct savings rate were known, households might lack the self-control to reduce current consumption in favor of future consumption (Thaler and Shefrin 1981).
One fact that underscores the important role of self-control is that the typical middle-class American household accumulates retirement wealth primarily in three forms: social security, pensions, and home equity. Neither social security nor defined-benefit pension plans require willpower on the part of participants, and once a home is purchased, the monthly mortgage bill provides a useful discipline in building up equity.
Those Americans who have access to and make use of all three low- willpower savings techniques appear to be doing a decent job of saving for retirement. Gustman and Steinmeier (1998), using the 1992 Health and Retirement Survey of households with heads of household born between 1931 and 1941, find that households with pensions have what appear to be adequate income replacement rates. A majority of the pensions in their sample are of the defined-benefit variety, however, in which self-control plays no role. Over the past decade, there has been a rapid change toward defined-contribution plans that require employ- ees to actively join and select their own savings rate. For those workers who are eligible only for a defined-contribution plan and elect not to join or to contribute a token amount, savings adequacy may be much