Optimal Paternalistic Savings Policies
131 Pages Posted: 28 Apr 2017 Last revised: 9 Jan 2019
Date Written: January 8, 2019
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: H21, E62, H55
Suggested Citation: Suggested Citation