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Optimal Paternalistic Savings Policies

Christian Moser () and Pedro Olea de Souza e Silva
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Pedro Olea de Souza e Silva: Uber Technologies

No 17, Working Papers from Federal Reserve Bank of Minneapolis, Opportunity and Inclusive Growth Institute

Abstract: 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.

Keywords: Optimal taxation; Multidimensional screening; Present bias; Preference heterogeneity; Paternalism; Retirement; Savings; Social Security; Active-set algorithm (search for similar items in EconPapers)
JEL-codes: E62 H21 H55 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age, nep-cmp, nep-mac and nep-pbe
Date: 2019-01-10
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DOI: 10.21034/iwp.17

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