What I’ve Learned: Olivia S. Mitchell

In a candid chat with Wharton Dean Erika James, professor Olivia S. Mitchell talks about her life’s work as an economist, and how we can make better decisions for retirement.

Iwent to high school in Lima, Peru, and in Santiago, Chile. My father was posted there as a diplomat. After that I taught kindergarten, [but] decided that wasn’t my cup of tea. I went on to teach literacy to the slum dwellers that lived around Lima who didn’t know how to read and therefore couldn’t even take a bus because they didn’t know what it said on the bus.

When I went to college in the U.S., I continued working on development topics. I wrote a senior thesis on the difficulties and challenges of worker self-managed firms in Peru. Then I went on to graduate school where I decided to diversify a little bit and start to study public finance.

My first job right out of school was teaching at Cornell University, where my department chair asked me to teach a course on pensions and health insurers. I was 25 years old. I had no clue. So I read the book quickly, and I thought this is an interesting topic. Then I came to Wharton, [which] hired [me] to continue studying pensions and issues of retirement security. And here I am. I’ve never deviated from that path.

Seeds of a Career in Retirement Security

James: Did you always know that you were going to pursue a career in academia?

Mitchell: No, I had no idea I was going to become an academic. I always had a five-year plan. So when I finished graduate school, I interviewed with the World Bank, the Foreign Service, and some other companies. I thought I’ll give it five years in academia, and then another five. And here I am, 42 [years]. One year later, I’ll still say, I’ll give it another five.

James: You’ve been at Wharton for how long?

Mitchell: Thirty years and it’s been terrific. I was brought in to work on directing the Pension Research Council, but I’ve also been teaching, I teach a course now, open to all undergraduates at Penn called Consumer Financial Decision Making. It’s all about the kinds of things you need to know as an adult moving into the financial world.

James: And you created that course.

Mitchell: [Wharton finance professor] Nikolai Roussanov and I created it. It’s always completely booked up. It’s a ton of fun. And the students write to me later saying, “Oh, it’s great. Can you help me with my 401(k) choice?” and things like that.

James: Other than retirement planning, what are some of the other consumer choices that you discuss in the class?

Mitchell: We talk about everything from student loans, whether you should take a lease or buy a car, credit card problems and whether you should pay only the minimum every month, which too many people do.

Then we go through the life cycle. At some point you might think about trying to buy a house or an apartment. At some point, probably early, you should think about disability insurance, life insurance, starting a family, and all the things that have 529 plans tied to them. Then, of course, we need to think about saving for retirement from a very young age, because if you don’t, you’re going to wish that you had a little bit later.

James: Let’s dive into your research a little bit. I want to take it back to the beginning because your research, which spans decades and covers a variety of different topics in both finance and economics. What drew you to those topics? I know you said you were doomed to study [them], but what was it about that time, those fields, that resonated with you so much?

Mitchell: I got involved back in 1992 with a great study called the Health and Retirement Survey. And this is a nationally representative study of people over the age of 50, financed by the National Institute on Aging. We surveyed 20,000 people every two years from when they enter until they pass away. We also have merged – with their permission – their Social Security earnings records, benefit records, Medicare records, and so forth. We can see what factors are driving their retirement saving, when they claim their benefits and what happens to them in later life.

Along the way I decided to launch a short module on financial literacy trying to find out answers to very simple questions one on inflation, one on interest rates, and one on risk diversification. I was shocked to find out that fewer than half of the older American population, 50 and over, could answer all three questions right. If they can’t do that, how are they going to decide if they’ve saved enough or invested enough, or maybe they’ll withdraw their money too quickly from their retirement pot later in life. That led to a big effort to try to enhance financial literacy.

Our survey has now been delivered in over 150 countries. It’s part of a high school test in Europe to examine students’ financial literacy. It’s just been a fascinating effort. That is so important, reflecting all of the things that I didn’t know when I was coming of age and even into adulthood until it’s almost too late to make good choices.

Behavioral Economics and Retirement Planning

James: Your research delves into the intersection of behavioral economics and retirement planning. Tell us more how you think about the concept of behavioral economics and what does that actually mean?

Mitchell: Well, the whole behavioral area has [seen] enormous growth over the past 20 years. As it pertains particularly to the retirement age-plus population, I focused on the kinds of things that people don’t know about their own future livelihoods.

In one interesting example, a colleague from Microsoft Research showed people a picture of their current face and then with software age the face. There was a slider button at the bottom and as you slid the button to the right, you save more for retirement. The face at the right, your future self, became happier and happier. As you slid the slider to the left, the current face became very cheerful, and the guy on the right was morose. This is what people need to visualize their future selves.

In fact, I’ve recently been talking to people about trying to design an avatar to try to go through alternative retirement scenarios. That really is helpful, and it teaches us the kinds of behavioral obstacles people face when they try to visualize themselves in the future.

Preparing for Longevity Risk

James: So as I get closer and closer to retirement

Mitchell: We hope not.

James: Not anytime soon, but every year I’m closer and closer. Sometimes it can be daunting to think about all of the options and all the considerations. Because for most of us, it’s not something that we were taught earlier in life. Do you find that as you’re interacting with people of different demographic ages that they are either more or less receptive to learning and changing behaviors in a way that would prepare them for their future retirement?

Mitchell: One of the things we’ve been looking at recently is the concept of longevity risk. Not only do people have to have a sense of, on average, how long they’ll live, but also, what’s the tail of the distribution? What are the chances you’ll survive to 85, 95, 105, and so forth? We see big differences, demographic differences.

Interestingly enough, in the U. S., the Black population seems to think it will live longer than it will, given the objective survival table. Women tend to underestimate how long they will live. All those factors shape how much you save, whether you claim your Social Security benefits too early, and whether you spend your money too quickly and run out of money in later life.

We’ve been trying to come up with simple explanations. Did you realize that a male, say of age 65, has a 35% chance of living to age 90, and [that is] higher for women. That gets people to sit up and say, “Oh, number one, I regret I didn’t save enough. Number two, I regret claiming my Social Security benefits too early. And number three, I wish I had bought long-term care insurance and an annuity. So there are ways that we’re trying to bring these subjects to people in a way that makes it very concrete and very individual, and helps them make better financial decisions.

Shaping Retirement Policies

James: Your work has influenced policy decisions globally. Can you share particular instances where your research directly impacted retirement policies, either here or somewhere outside of the U.S., and how did it shape your notions for what to study going forward?

Mitchell: I had the good fortune to work on President George W. Bush’s Commission to Strengthen Social Security. This was 20 plus years ago. It was a bipartisan commission with eight Democrats and eight Republicans, co-chaired by Senator Daniel Patrick Moynihan and Richard Parsons. We had a good plan, which was basically to reduce the growth rate of benefits, but not cut benefits.

The second piece was to allow people, if they wanted to have access to Social security to set aside part of their Social Security taxes in a personal account. Long and short of it, due to political opposition and also the fact that that year had 9/11, the plan was dead in the water.

It’s currently estimated that Social Security will become insolvent by 2033 and Medicare as well shortly thereafter. At that point, the benefits will have to be cut by 25% to 30% for everybody. Or taxes will have to be increased by about 30%.

Around the world, this issue is consistent. Populations are aging, fertility rates are declining. There simply isn’t the demographic mass of workers that can help support people in later life to the extent that they [have] become accustomed to.

James: And people are living longer.

Mitchell: And people are living longer, exactly. It’s not a popular view, especially in countries like France, where the prospect of raising the retirement age from 62 to 64 drew out mass demonstrations in the street.

James: I’m curious whether AI has any influence or any role to play in the future of your work?

Mitchell: Well, very interesting topic. Everyone is obviously speculating like crazy. I do think that artificial intelligence can help us do a better job of tailoring our lifecycle saving and investment and withdrawal profile. Right now, in the U. S. at least, we tend to have one-size-fits-all solutions.

Target date funds are very popular in retirement plans. [Financial advisors] say, “How old are you? What’s the year you’re going to turn 65? Boom, we’re going to put you in that target date fund.” And the rest is not necessary to be discussed. But obviously people are different.

Right now, if you put in simple questions to AI, it tells you that 60-40 is a good stock bond allocation. It’s still very simple. The other problem is that at the payout phase, things get much more complicated. So there’s progress and optimism, and I can’t wait to see what happens. I think that’s true for many of us.

The Difficulty of Thinking into the Future

James: What has been the most challenging thing to convey to either organizations or to individuals to help them understand the urgency of needing to find solutions for our current problems with the pension and social security systems?

Mitchell: Probably the most difficult concept is a deep-rooted one, which is that people simply have a hard time thinking into the future. Way back when I started working with the Social Security Administration, they only used a 10-year projection period to see if the system was solvent. Well, 10 years is nothing for people that are just starting their work lives or even at age 55 or 60.

Over time, Congress induced Social Security to take a 75-year window. Now they do their projections for that period. Their logic is that, well, the baby born today will probably live to age 75. But there are a lot more babies who are going to live beyond that, and so now we need to take a much longer perspective.

Their answer, and somewhat credibly, is, who knows what’s going to happen in the future? We may all get COVID again, or we may cure cancer and live to be 2,000. But the point is, if you’re putting in place one of the world’s biggest government expenditure programs and you’re not making long-term projections, then you will have a hard time making tweaks as you go along and as the world changes. Future focus is one of the bigger, more difficult things to convey.

James: One of the things that I have appreciated about the way you have navigated your career at Wharton is that you’ve been very engaged with the public sector. You’ve been very engaged with the corporate sector, including TIAA. Can you tell us a little bit about the work that you’ve done or the partnership you’ve created with TIAA?

Mitchell: TIAA has been an amazing supporter of the Pension Research Council. I’ve been a participant in TIAA since I was 25 years old. So I’m a long term supporter. One of the reasons it’s such an interesting partner is that they are not only seriously interested in doing a good job providing people with retirement saving and payouts, but they’re also devoted to the research.

Way back the Pension Research Council had published a book that its CEO had written called, It’s My Retirement Money, Take Good Care of It. Over about the last eight years, TIAA and the Pension Research Council have combined forces to issue calls for proposals to any researcher in the U.S. At a government, nonprofit, or academic institution, we’ve sponsored numerous different research studies, including, I’m happy to say, some of mine.

One of TIAA’s very interesting products is something called a participating annuity. No other U. S. company has these. Because it was allowed by Congress back in the Stone Age. Essentially, it’s an insurance product [that] guarantees you a payout the rest of your life, no matter how long or short you live. But the insurance company doesn’t have to bear the cost, or the risk of surprises to the mortality table. If all of a sudden everybody lives 10 years longer or COVID comes along, the participants in the pool share that risk. What it means is their product is much less expensive than any other annuity on the market. It’s quite prevalent in Europe. You see it elsewhere. How can we do better integrating lifetime income streams into the 401k world, the defined contribution world?

Positive Reinforcement at Wharton

James: I’d like to switch gears a little bit and talk about your time specifically at Wharton. You’ve been here for 30 years. How have you seen the school evolve in that time, particularly with respect to the department that you’re in and the nature of the research and the students over those 30 years?

Mitchell: When I joined Wharton, I joined the Department of Insurance and Risk Management. My predecessor, Dan McGill, had founded the Pension Research Council to bring greater knowledge and integration into the field of retirement research. He brought in actuaries and insurance folks. When I came in, the world had changed somewhat. Instead of everybody having defined benefit pensions like in the auto industry and so forth, which was the old norm, the new norm is a defined contribution plan. I broadened our perspective to be able to include plan design discussions, studies of participant behavior, and so forth.

I’m delighted to say we’ve celebrated our 70th anniversary for the Pension Research Council [this year]. I have a wonderful advisory board, many of them Wharton grads, I’m happy to say. The nice conversations we have within our board spans academia and industry, and policy problems and issues and challenges. So it’s a great way for me as a faculty member and our academic colleagues to get grounded, to identify the next issue, and see how we can help policy makers solve some of the problems in industry as well.

It’s very opportune to say that in this world of global aging, I am excited to see what the Pension Research Council can accomplish in the next 70 years.

Pensions, the Microcosm of Almost Everything

James: As we think about the future, I want to ground us in the Wharton context, or higher education and academia in general. As a senior stateswoman in your field and as a senior scholar, what advice do you have for current and future young scholars in this field?

Mitchell: I see the area of pensions or retirement as a microcosm of almost everything. It’s got consumer behavior. It’s got industry structure. It’s got macro and microeconomics. It’s got psychology. When I first started down this path, there was some discouragement because it was so multidisciplinary. That’s often something that in the rest of the world, in other academic institutions, is frowned [upon]. One of the great things about Wharton is it does encourage multidisciplinary research and collaboration. So that’s been wonderful.

Of course, good scholarship of any type demands a strong foundation. I always tell my students, “Do what’s difficult when you’re in school, because you have to force yourself.” I didn’t have to force myself to really learn statistics and econometrics and the things that I couldn’t sit down with a book under a tree and read and learn. And then with that edifice, you can do all sorts of things the rest of your life.

On top of that strong foundation — in my field it would be finance and economics and econometrics and statistics — I think it’s also important to read widely and talk to people. [That helps in] understanding that we’re all different. Our solutions are different. Our problems are very similar. We can learn from each other. That has been a real joy here at Wharton.

James: Wonderful. The first person that we interviewed for the “What I’ve Learned” series was Anita Summers. She was one of the first female faculty members at the Wharton School in economics and public policy. She talked about the experience early in her career of being a woman in a field that was not necessarily considered to be the domain of women. Have you faced any challenge in studying the unique aspects that you bring to the understanding of this field because of your gender?

Mitchell: Well, my mother applied to a PhD program at Harvard in economics, and the only reason they let her in is she agreed to type the department chairman’s papers. Thirty or forty years ago, I would be in a room with a hundred other economists, and I’d be the only female.

Being in a school with yourself as dean, with very prominent women, was what attracted me to Wharton when I did make the move. There were also very strong women presidents of Penn over the years, and that makes a difference. It makes the environment more friendly.

Of course, over the years, one also figures out how to speak, whom to speak with, and when to speak. That’s the most important thing. But it’s been a very nurturing environment, and it continues to be so, and so for that, I thank you and your predecessors [who] have done such a great job. It is an incredible culture here at the Wharton School.

James: So, final question. This series is called “What I’ve Learned.” If we were to end with your greatest piece of advice from with what you’ve learned over the years, what would that be? It may not have anything to do with pension research.

Mitchell: I would say, just don’t give up. In fact, my dearly departed mother used to say, “Overcome dear, overcome,” and that mantra stands one in good stead. I had a number of brilliant friends and co-students in graduate school, some of whom never went anywhere because they got discouraged. They got a rejection letter from a journal and put it in the drawer and never looked at it again.

It’s not like we haven’t had our challenges over the years. But usually there’s a different path — if you can’t go over it or under it, go around it. The advice I give my students is: Try to think of questions such that no matter what the answer is, it’s always interesting.

You don’t want to say, “Is X is true?” and find out it’s not. Then what do you do? Do you want to know why is X true or not true, or what [you can] learn from that? So, part of what I try to do in teaching is to try to help people ask interesting questions.

James: Well, Olivia, I’ve learned a lot from you, and I know that you have generations of students who have benefited from your engagement with them in the classroom. We’re thrilled that you have chosen Wharton to be your academic home and will continue to be here, hopefully for quite some time.

Olivia: Thank you, ma’am. It’s a pleasure.