Is Automatic Enrollment Consistent with a Life Cycle Model?

Jason Scott, John B. Shoven, Sita Slavov and John G. Watson

No 28396, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine optimal retirement saving for young adults in a life cycle model. We find that for liquidity-constrained young adults who anticipate significant earnings growth, optimal retirement saving is zero. Specifically, we find that with a plausible wage profile for college-educated workers, retirement saving does not begin until the late 30s or early 40s, even with standard employer matching. In fact, inducing workers in their mid 20s to participate in a retirement plan requires employer match rates of more than 1000 percent. In contrast, workers facing a flat wage profile begin saving much earlier in life. We also find that participating may be optimal for younger workers facing steeper wage profiles if they anticipate switching jobs and cashing out after 1-2 years. Our results suggest that automatically enrolling workers, regardless of age or anticipated future earnings, in defined contribution plans is not consistent with optimizing behavior in a life cycle model.

JEL-codes: D14 D15 J26 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-age and nep-dge
Note: AG
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Citations: View citations in EconPapers (3)

Published as Jason S. Scott & John B. Shoven & Sita N. Slavov & John G. Watson, 2022. "Is automatic enrollment consistent with a life cycle model?," Economic Inquiry, vol 60(1), pages 9-20.

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