Optimal Paternalistic Savings Policies
Abstract: We study optimal savings policies when there is a dual concern about undersaving for retirement and income inequality. Agents differ in present bias and earnings ability, both unobservable to a planner with paternalistic and redistributive motives. We characterize the solution to this two-dimensional screening problem and provide a decentralization using realistic policy instruments: mandatory savings at low incomes but a choice between subsidized savings vehicles at high incomes?resembling Social Security, 401(k), and IRA accounts in the US. Offering more savings choice at higher incomes facilitates redistribution. To solve large-scale versions of this problem numerically, we propose a general, computationally stable, and efficient active-set algorithm. Relative to the current US retirement system, we find significant welfare gains from increasing mandatory savings and limiting savings choice at low incomes.
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Description: Full text
Provider: Federal Reserve Bank of Minneapolis
Part of Series: Opportunity and Inclusive Growth Institute Working Papers
Publication Date: 2019-01-10
Pages: 132 pages