Efficient Consolidation of Incentives for Education and Retirement Savings
87 Pages Posted: 7 Nov 2019 Last revised: 19 Apr 2023
Date Written: May 27, 2019
We study optimal tax policies with human capital investment and retirement savings for present-biased agents. Agents are heterogeneous in their innate ability and make risky education investments which determines their labor productivity. We demonstrate that the optimal distortions vary with education status. In particular, the optimal policy encourages human capital investment with savings incentives. Our implementation uses income-contingent student loans and existing retirement policies, augmented by a new tax instrument that subsidizes retirement savings for college graduates. The instrument mimics the latest policy proposals by allowing employers to offer 401(k) matching contributions proportional to student loans repayment.
Keywords: Present bias, Taxation, Human capital, Retirement
JEL Classification: H62, H21, H55, I22
Suggested Citation: Suggested Citation