Finance Seminar with Taha Choukhmane, MIT Sloan School of Management

The Department of Finance is proud to announce the upcoming seminar with Taha Choukhmane, MIT Sloan School of Management.

Taha Choukhmane, will present: The Effect of Increasing Retirement Saving on Consumption, Balance Sheets, and Welfare

Abstract:
Does raising retirement contributions increase net wealth accumulation and improve lifetime welfare? The answer depends on how individuals finance the additional contributions: by cutting spending, reducing non-retirement savings, or increasing debt. We use newly linked deposit, credit, and pension data from a large UK financial institution to study a gradual increase in minimum retirement contributions from 2% to 8% of salary. On average, only one-third of the increase is funded through reduced spending (especially in discretionary categories like restaurants and leisure), with the rest of the decrease in take-home pay financed through higher borrowing and lower nonretirement saving. Low-liquidity individuals primarily cut spending, while those with high-liquidity shift existing savings across accounts with minimal impact on spending over two years. We show that these behavioral responses are crucial for welfare analysis in a sufficient statistics framework: well-targeted policies raise contributions among those who (i) exhibit less crowd out and (ii) are more prone to undersaving (e.g., due to present bias). We identify these groups in a lifecycle model by targeting the observed spending responses (to identify low crowd-out individuals) and the persistence of simultaneous retirement saving and credit card borrowing (to identify present bias). Using the estimated model, we find that standard financial incentives for retirement saving are poorly targeted, as they are disproportionately taken up by high-liquidity, time-consistent individuals who exhibit high crowd-out. Conversely, asset tests on tax incentives help screen out such individuals, and retirement income floors and annuities provide commitment for present-biased households.

Location:
Solbjerg Plads 3
2000 Frederiksberg
Room: SPs03