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Is Automatic Enrollment Consistent with a Life Cycle Model?

Author

Listed:
  • 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.

Suggested Citation

  • Jason Scott & John B. Shoven & Sita Slavov & John G. Watson, 2021. "Is Automatic Enrollment Consistent with a Life Cycle Model?," NBER Working Papers 28396, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28396
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    Cited by:

    1. Nicoleta Ciurilă & Carolijn Kok & Harry ter Rele & Peter Zwaneveld, 2022. "Optimizing the Life-Cycle Path of Pension Premium Payments and the Pension Ambition in the Netherlands," De Economist, Springer, vol. 170(1), pages 69-105, February.
    2. Derby, Elena & Mackie, Kathleen & Mortenson, Jacob, 2023. "Worker and spousal responses to automatic enrollment," Journal of Public Economics, Elsevier, vol. 223(C).
    3. Harry ter Rele & Carolijn de Kok & Nicoleta Ciurila & Peter Zwaneveld, 2021. "Optimizing the life cycle path of pension premium payments and the pension ambition in the Netherlands," CPB Discussion Paper 421.rdf, CPB Netherlands Bureau for Economic Policy Analysis.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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