Working Paper: NBER ID: w21168
Authors: John Beshears; James J. Choi; Joshua Hurwitz; David Laibson; Brigitte C. Madrian
Abstract: What is the socially optimal level of liquidity in a retirement savings system? Liquid retirement savings are desirable because liquidity enables agents to flexibly respond to pre-retirement events that raise the marginal utility of consumption. On the other hand, pre-retirement liquidity is undesirable when it leads to under-saving arising from, for example, planning mistakes or self-control problems. This paper compares the liquidity that six developed economies have built into their employer-based defined contribution (DC) retirement savings systems. We find that all of them, with the sole exception of the United States, have made their DC systems overwhelmingly illiquid before age 55.
Keywords: liquidity; retirement savings; defined contribution; international comparison
JEL Codes: D14; F61; H3; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Liquidity in retirement savings systems (G23) | Flexibility to respond to pre-retirement events (J26) |
| Pre-retirement events that raise consumption utility (J26) | Liquidity in retirement savings systems (G23) |
| Excessive liquidity (E51) | Under-saving due to planning mistakes or self-control issues (D14) |
| Liquidity in retirement savings systems (G23) | Savings behavior (D14) |
| System design (C90) | Liquidity in retirement savings systems (G23) |
| Liquidity (E41) | Propensity to save (E21) |
| Higher MRT values (R49) | Greater liquidity (G19) |
| Liquidity contingent on income shocks (G59) | Early withdrawals (J26) |
| Early withdrawals banned (G23) | Low liquidity (G19) |