Working Paper

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.

Keywords: Optimal taxation; Multidimensional screening; Present bias; Preference heterogeneity; Paternalism; Retirement; Savings; Social Security; Active-set algorithm;

JEL Classification: E62; H21; H55;

https://doi.org/10.21034/iwp.17

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Opportunity and Inclusive Growth Institute Working Papers

Publication Date: 2019-01-10

Number: 17

Pages: 132 pages