As we age, there is generally a decline in fluid intelligence (general reasoning capacities used to solve new problems), but an increase in crystallized intelligence (the ability to call upon knowledge and experience to solve problems). This process, called “cognitive aging,” and its effect on the ability of retirees to manage their savings is the subject of a new report published by the Boston College Center for Retirement Research (CRR). Overall, the findings suggest that grandma and grandpa are, on balance, more than capable of managing their retirement — a finding with important implications for debates related to public sector pension reform.
The goal of traditional public sector defined benefit pension plans is to guarantee retirement security for public workers — specifically, to provide income in retirement — to ensure they can smoothly transition from the workforce without worrying about how they will satisfy their financial needs during their golden years. A common argument against moving away from defined benefit pensions to defined contribution retirement plans is that retirees are unqualified to properly manage their retirement savings so they last for the rest of their lives and cover both anticipated and unanticipated expenses (this should be differentiated from a more generalized fear over individuals’ ability to make good decisions in managing their own investments, which deserves its own response).
But the CRR report says otherwise: “Most people who experience normal cognitive aging can continue managing their money in their 70s and 80s,” the authors write. This is because while “some people over 70…might make more mistakes due to declining judgment…accumulated knowledge explains how people handle money effectively despite decreased fluid ability.”
In other words, any decrease in mental agility is made up for by a lifetime of experience managing personal finances.
While most retirees will be fine, there are two important caveats to this finding. First, such findings are necessarily about seniors on average and not necessarily applicable in to all individuals. The benefits of accumulated knowledge do not extend to those who are inexperienced with managing finances, namely those who must manage retirement savings after the original account holder dies or becomes incapacitated. Cognitive aging, the report says, exacerbates the harms from a lack of experience.
Second, in addition to a decline in fluid intelligence, some retirees face more serious biological limitations — i.e. severe impairment of cognitive faculties — as well. According to the report, almost half of those above age 80 experience either mild cognitive impairment or dementia, increasing to 64% for those above 85. The impact of such impairment on the ability to manage retirement savings is significant. For retirees above age 70, 82% of those with mild cognitive impairment and only 20% of those with dementia were capable of managing their finances, compared to 95% of those with no impairment.
But, even if some retirees’ ability to manage their money isn’t sufficient to guarantee a stable retirement, there are policies publicly administrated DC plans could take to ensure this, such as providing additional financial management services to those suffering from cognitive impairment or ensuring there are annuitization options available to purchase through the DC plan.