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Federal Reserve Bank of Minneapolis, Opportunity and Inclusive Growth Institute
Working Papers
Optimal Paternalistic Savings Policies
Christian Moser
Pedro Olea de Souza e Silva
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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Christian Moser & Pedro Olea de Souza e Silva, Optimal Paternalistic Savings Policies, Federal Reserve Bank of Minneapolis, Opportunity and Inclusive Growth Institute, Working Papers 17, 10 Jan 2019.
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Keywords: Optimal taxation; Multidimensional screening; Present bias; Preference heterogeneity; Paternalism; Retirement; Savings; Social Security; Active-set algorithm
DOI: 10.21034/iwp.17
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