Default options and retirement saving dynamics - Taha Choukhmane

Finance

Speaker : Taha Choukhmane

Videoconference

Does automatic enrollment in retirement savings plans increase lifetime wealth accumulation and welfare? I document that employees offset the short-run positive effect of automatic enrollment by saving less in the future. Consequently, a lifecycle model estimated on data from 34 U.S. 401(k) plans predicts that the long-term effect of auto-enrollment on wealth is negligible except at the bottom of the lifetime earnings distribution. The model’s long-run predictions are supported by its out-of-sample performance in predicting behavior in 86 other 401(k) plans and nationally representative U.K. data. The observed inertia at the savings default is explained by an opt-out cost of around $250. My estimate is smaller than the thousands of dollars estimated in previous studies because, in my fully dynamic model, non-autoenrolled workers can compensate for not contributing now by contributing more later. Automatic enrollment improves social welfare if the policymaker is more patient than individuals or puts more weight on low-income individuals’ utility.

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