“Default Options and Retirement Saving Dynamics”. Revise and resubmit, American Economic Review. [This version: August 2023]
I document that employees offset the short-run positive effect of auto-enrollment in retirement plans by saving less in the future: saving gains are attenuated within three years except at the bottom of the savings distribution. The heterogeneity and dynamics of auto-enrollment’s impact are well captured by a lifecycle-model with an estimated opt-out cost of approximately $250. My estimate is smaller than the thousands of dollars estimated in previous studies because non-auto-enrolled workers can compensate for not contributing now by contributing more later. Consequently, the model predicts modest changes in lifetime wealth accumulation for most but persistent gains at the bottom.
“What Drives Investors’ Portfolio Choices? Separating Risk Preferences from Frictions” with Tim de Silva (MIT). [This version: February 2023]. Revise and resubmit, Journal of Finance.
We study the role of risk preferences and frictions in portfolio choice using variation in 401(k) default investment options. Patterns of active choice in response to different default funds imply that, absent participation frictions, 94% of investors prefer holding stocks, with an equity share of retirement wealth declining with age—patterns markedly different from their observed allocations. We use this quasi-experiment to estimate a lifecycle model and find relative risk aversion of 2, EIS of 0.4, and a $200 portfolio adjustment cost. Our results suggest low stock-market participation is due to participation frictions rather than non-standard preferences such as loss-aversion.
“Efficiency in Household Decision Making: Evidence from the Retirement Savings of US Couples”, with Lucas Goodman (US Treasury) and Cormac O’Dea (Yale). Revise and resubmit, American Economic Review. [Slides: July 2022] [Draft: April 2023].
Pareto efficiency is a core assumption of most models of the household. We test this assumption using a new dataset covering the retirement saving contributions of 1.3 million U.S. couples. While a vast literature has failed to reject household efficiency in developed countries, we find evidence of widespread inefficiency in our setting: retirement contributions are not allocated to the account of the spouse with the highest employer match rate. This lack of coordination cannot be explained by inertia, auto-enrollment, or simple heuristics. Instead, we find that indicators of weaker marital commitment correlate with the incidence of inefficient allocations.
“Who Benefits from Retirement Saving Incentives in the U.S.? Evidence on Racial Gaps in Retirement Wealth Accumulation“, with Jorge Colmenares, Cormac O’Dea (Yale), Jonathan Rothbaum (Census), and Lawrence Schmidt (MIT). [Slides: July 2022] draft available.
In 2020, U.S. private employers and the federal government devoted a combined $300bn to encourage contributions to retirement savings plans. In this paper, we study the distributional impact of these tax and employer match incentives across racial groups using a new linked employer-employee data set covering millions of Americans. On average, White workers contribute 4.6% of their salary to employer-sponsored retirement accounts whereas Black (Hispanic) workers contribute 2.9% (3.3%) of their salary. Differences in income across racial groups explain only one-third of this racial gap in retirement saving, and large disparities remain even after further controlling for education, occupation, county of residence, employer fixed effects, and homeownership. This gap in contributions, amplified by the tax and matching incentives, implies that the average Black (Hispanic) American would retire with around $350,000 ($280,000) less wealth at age 60 than the average White American. We explore two mechanisms driving differences in contribution between employees with similar individual-level characteristics. First, household composition and parental characteristics can explain nearly half of the residual gap in retirement contributions across racial groups. Second, we find evidence that Black and Hispanic individuals face tighter liquidity constraints. Black retirement savers are twice as likely as Whites to take an early withdrawal from their retirement account in any given year, a sign of limited access to alternative means of liquidity. These findings suggest that the institutional design of U.S. retirement plans, which rewards those who can and do save more, exacerbates racial wealth gaps and propagates wealth inequality across generations.
“How Do Consumers Finance Increased Retirement Savings?” with Christopher Palmer (MIT). draft available.
The welfare impact of increasing retirement contributions depends on how individuals adjust their spending, borrowing, and non-retirement savings in response. Using newly merged deposit-, credit-, and pension-account data from a large UK financial institution, we estimate the relevant elasticities by leveraging a policy that incrementally increased minimum retirement contributions in the U.K. from 2% to 8% of salary between March 2018 and April 2019. For every £1 reduction in monthly take-home pay due to higher employee pension contributions, consumers cut their spending by £0.34 (especially in the restaurant and leisure categories) and finance the remaining with lower deposit account balances and higher credit card debt levels. Those with lower initial deposit balances cut their spending the most, while those with significant liquid savings draw down their deposits. Interpreted via a theoretical model, these results suggest that a social planner concerned about undersaving should target retirement saving interventions at low-liquidity individuals whose spending is more elastic to increased retirement saving. In contrast, interventions that increase the retirement contributions of high-liquidity individuals are both less efficient (due to large crowd-out) and often regressive.
“The One Child Policy and Household Saving” with Nicolas Coeurdacier (SciencesPo) & Keyu Jin (LSE). forthcoming, Journal of the European Economics Association. [working paper version]
We investigate whether the ‘one-child policy’ has contributed to the rise in China’s household saving rate and human capital in recent decades. In a life-cycle model with intergenerational transfers and human capital accumulation, fertility restrictions lower expected old-age support coming from children—inducing parents to raise saving and education investment in their offspring. Quantitatively, the policy can account for at least 30% of the rise in aggregate saving. Using the birth of twins under the policy as an empirical out-of-sample check to the theory, we find that quantitative estimates on saving and education decisions line up well with micro-data.
“The Evolution of U.S. Firms’ Retirement Plan Offerings: Evidence from a New Panel Data Set” with Antoine Arnoud (IMF), Jorge Colmenares (MIT), Cormac O’Dea (Yale) and Aneesha Parvathaneni (Yale). [April 2021]