Institute Working Paper 17

Optimal Paternalistic Savings Policies

Christian Moser | Opportunity & Inclusive Growth Institute Visiting Scholar and Columbia University
Pedro Olea de Souza e Silva | Uber Technologies

Published January 10, 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.

DOI: https://doi.org/10.21034/iwp.17

Read the PDF ›