Optimal Paternalistic Savings Policies

TitleOptimal Paternalistic Savings Policies
Publication TypeJournal Article
Year of Publication2019
AuthorsMoser, C, Silva, POlea de So
JournalSSRN Electronic Journal
KeywordsEconomic behaviors, Fathers, Paternal support, Policy, policy effects, Saving

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.

Citation Key10.2139/ssrn.2959844