Optimal Paternalistic Savings Policies
Abstract
We study optimal savings policies when there is a dual concern about under-saving for retirement and income inequality. Agents differ in time preferences 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: forced savings at low incomes — similar to Social Security — but a choice between savings accounts with different subsidies and caps at high incomes — like 401(k) and IRA accounts in the US. Offering more choice in savings at higher incomes facilitates redistribution. Relative to the current US retirement system, we find large welfare gains from increasing mandatory savings and limiting savings choice at low incomes.
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Citation
Moser, Christian, and Pedro Olea de Souza e Silva. "Optimal Paternalistic Savings Policies." Institute Working Paper 17, Federal Reserve Bank of Minneapolis, January 10, 2019.
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