Events at CERGE-EI

Let us invite you to a Brown Bag Seminar by Marta Cota (CERGE-EI Ph.D. student) on Wednesday, September 14, 2022, at 14:30 in room 402.  You can join also online: Lifesize link: https://call.lifesizecloud.com/15584956, password: 2370.

Presenter: Marta Cota

Title: "Extrapolative Expectations: Retirement Savings"

Abstract: "This paper develops a structural life-cycle model with income persistence biases observed in the Michigan Survey of Consumers data. I analyze the decomposition of liquid and (illiquid) retirement savings between rational and biased workers. In the model, income persistence bias acts differently across the income distribution. Low-income workers are pessimistic about their future income growth and therefore are less willing to forgo their liquid buffers. In contrast, high-income workers expect their future income to persist and postpone retirement contributions, consuming more at the beginning of the work-life. While standard behavioral assumptions do not match retirement account contributions over the work-life, this model captures contribution patterns under voluntary contribution choice. That is, in a voluntary setting workers eventually catch-up with their retirement savings. Even though the bias affects retirement contributions through amplified precautionary motives, the rise in income level over the life cycle initiate workers' catching up with retirement contributions. Complementary to the data, variation in contribution rates along the income distribution implies gross savings rates increasing with wealth, whereas net savings rates remain flat. Under automatic enrollment, the bias induces sticking to default (low contribution) choices at the expense of consumption, and an offset in contribution rates towards retirement. Therefore, automatic enrollment does not increase retirement savings across the income distribution, but only decreases low-income workers consumption throughout the work life span. Therefore, automatic enrollment implies insignificant welfare improvements."

This project is co-financed by the European Union.