Optimal Paternalistic Savings Policies

131 Pages Posted: 28 Apr 2017 Last revised: 9 Jan 2019

Date Written: January 8, 2019

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: H21, E62, H55

Suggested Citation

Moser, Christian and Olea de Souza e Silva, Pedro, Optimal Paternalistic Savings Policies (January 8, 2019). Columbia Business School Research Paper No. 17-51. Available at SSRN: https://ssrn.com/abstract=2959844 or http://dx.doi.org/10.2139/ssrn.2959844

Christian Moser (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States
6093564653 (Phone)

HOME PAGE: http://www.economoser.com

Pedro Olea de Souza e Silva

Wealthfront, Inc. ( email )

900 Middlefield Rd
Redwood City, CA 94063
United States

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