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Optimal Paternalistic Savings Policies

Christian Moser () and Pedro Olea de Souza e Silva

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

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: Preference heterogeneity; Paternalism; Multidimensional screening; Present bias; Optimal taxation; Retirement; Savings; Active-set algorithm; Social Security (search for similar items in EconPapers)
JEL-codes: H55 H21 E62 (search for similar items in EconPapers)
Pages: 132 pages
Date: 2019-01-10, Revised 2019-01-10
New Economics Papers: this item is included in nep-age, nep-cmp, nep-mac and nep-pbe
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DOI: 10.21034/iwp.17

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