Working Paper: NBER ID: w27459
Authors: John Beshears; James J Choi; Christopher Clayton; Christopher Harris; David Laibson; Brigitte C Madrian
Abstract: We calculate the socially optimal level of illiquidity in an economy populated by households with taste shocks and present bias (Amador, Werning, and Angeletos 2006). The government chooses mandatory contributions to respective spending/savings accounts, each with a different pre-retirement withdrawal penalty. Penalties collected by the government are redistributed through the tax system. When naive households have heterogeneous present bias, the social optimum is well approximated by a three-account system: (i) a completely liquid account, (ii) a completely illiquid account, and (iii) an account with a ~10% early withdrawal penalty. In some ways this resembles the U.S. system, which includes completely liquid accounts, completely illiquid Social Security and 401(k)/IRA accounts with a 10% early withdrawal penalty. The social optimum is also well approximated by an even simpler two-account system—(i) a completely liquid account and (ii) a completely illiquid account—which is the most common retirement system in the world today.
Keywords: liquidity; retirement savings; present bias; social welfare
JEL Codes: D02; D14; G51; H21; H31; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| account structure (M41) | social welfare (I38) |
| partially illiquid account with low early withdrawal penalty (G23) | welfare improvement (I38) |
| leakage rates from partially illiquid accounts (G33) | early withdrawals (G51) |
| two-account system (P40) | social optimum (D61) |
| account structure (M41) | consumption patterns (D10) |
| two-account system (P40) | welfare losses for households with high present bias (D15) |