Everybody has some responsibility–employers because of the role they play in funding retirement, government because of the role of payroll taxes, and economists because I believe they can, and should, contribute to increase social welfare.

And individuals have to invest wisely.

The goal is to determine the set of investments that will maximize your happiness, taking into account all possible future personal states and all possible market outcomes. Your job, aided no doubt by an advisor or financial manager, is to pick investments, and perhaps insurance, that will maximize your happiness, taking into account all the possibilities in each table for each future year.

How will using rigorous economic analysis change people’s choices?

Let me give you a prototypical example. Let’s assume that I don’t know if 10 years from now I’m going to be in a nursing facility or if I’m going to be going on cruises. Let’s say I have some money and I can buy a variable or fixed payout annuity that will pay off if I’m well. And I can buy another one that will pay off only if I’m in a nursing home. These annuities do not exist now.

So what I want to do is buy a nursing home annuity that will pay me pretty much what I need for a good nursing home, but not much more. So it will be either a fixed annuity or something pretty close to it. On the other hand, I’ll want to take some risk with the annuity that pays off if I’m healthy, because if the financial markets are kind, the payouts will enable me to take some great cruises and stay in wonderful places, while if the markets are not so kind to me, I can get along OK. If I drew curves to represent these various scenarios, they would cross somewhere.

With present products, what can I do? I can buy a standard annuity, variable or fixed, that pays whether I’m sick or well. Then I can also buy an additional long-term care policy that will increase my income by some amount if I’m in the nursing home. But that doesn’t allow me to do what I really want to do. The solution is not so hard. The insurance companies just have to produce some new products.

Not so hard, but the financial markets alone present an infinite number of possible outcomes.

Let’s assume there can be 100 different possible states of the market in any given year, so you plot all of them. I’ve done that in some experimental work, and I think that’s probably perfectly sensible. It is better than using rules of thumb that are not very well grounded in personal issues.

Contrarians say people are saving too much because many models do not account for so-called consumption smoothing, or people’s natural tendency to self correct.

I’m sure there are some people who are saving too much, but I worry more about those who are saving too little. The real issue is whether or not people who are saving for retirement know what they will be able to do with the amount of money they’ll have if they keep on their present course.

It’s irresponsible to overgeneralize. What’s responsible is to say, "Let’s do our damnedest to help people understand what the alternatives for them are pre- and postretirement," so they can make informed judgments as to how much they personally want to save, and, once they get there, what they want to do with it. We need to get a lot of information from individuals to do what I’m talking about. And if people have no notion what cancer treatment or a top nursing facility will cost in real terms, that’s a problem. For good and bad reasons, we’re in a regime pretty much worldwide in which we have decided individuals are going to have to make these decisions pretty much on their own–and they just need a lot of help.