Working Paper: NBER ID: w28396
Authors: Jason Scott; John B. Shoven; Sita Slavov; John G. Watson
Abstract: We examine optimal retirement saving for young adults in a life cycle model. We find that for liquidity-constrained young adults who anticipate significant earnings growth, optimal retirement saving is zero. Specifically, we find that with a plausible wage profile for college-educated workers, retirement saving does not begin until the late 30s or early 40s, even with standard employer matching. In fact, inducing workers in their mid 20s to participate in a retirement plan requires employer match rates of more than 1000 percent. In contrast, workers facing a flat wage profile begin saving much earlier in life. We also find that participating may be optimal for younger workers facing steeper wage profiles if they anticipate switching jobs and cashing out after 1-2 years. Our results suggest that automatically enrolling workers, regardless of age or anticipated future earnings, in defined contribution plans is not consistent with optimizing behavior in a life cycle model.
Keywords: No keywords provided
JEL Codes: D14; D15; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Liquidity-constrained young adults anticipating significant earnings growth (G51) | Optimal retirement saving is zero (D14) |
| Borrowing constraints and near-zero real interest rates (E43) | Consumption profile declines with age (D15) |
| Real interest rate aligns with subjective rate of time preference (E43) | Saving begins immediately (E21) |
| Zero percent interest rate (E43) | Saving delayed to age 30 or later (J26) |
| Automatic enrollment in retirement plans (H55) | May not align with optimal behavior for younger workers (J29) |