Countercyclical retirement accounts

David A. Love

European Economic Review, 2017, vol. 98, issue C, 32-48

Abstract: This paper examines an unconventional, but potentially effective, new fiscal policy tool that can increase saving during good times and increase spending during bad times—a cyclical matching rate on contributions to retirement savings accounts. The combination of matching rates and matching limits on retirement savings plans creates sharp kinks in intertemporal budget sets that induce many households to save exactly at the matching limit, even when economic conditions might call for a fiscal policy to encourage spending, rather than saving. What if the matching rate instead disappeared during bad aggregate states? I model an economy with liquid and illiquid savings accounts in which matching is suspended during downturns. The economy features the usual sources of heterogeneity in education and earnings processes, and it allows for time-inconsistent preferences and heterogeneity in the discount rate. Although the theoretical effects of a countercyclical match are ambiguous due to income and substitution effects operating in different directions, the simulations of the model indicate that the policy delivers a large average increase in consumption from a set of households that look like the “wealthy hand to mouth” of Kaplan et al. (2014). And crucially, in contrast to conventional fiscal policy, the stimulus associated with countercyclical retirement actually improves the government’s financing.

Keywords: Fiscal policy; Retirement accounts; Precautionary saving (search for similar items in EconPapers)
JEL-codes: D91 E21 G11 G22 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:98:y:2017:i:c:p:32-48

DOI: 10.1016/j.euroecorev.2017.06.005

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