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Does it pay to be SMarT?*

  • T. SCOTT FINDLEY (a1) and FRANK N. CALIENDO (a2)
Abstract
Abstract

The Save More Tomorrow™ (or SMarT) plan has proven effective in raising employee saving rates and appears to be popular among participants and the media. An important question has remained on the minds of economists despite this success: just how close does the prescriptive SMarT plan come to approximating the normative life-cycle/permanent-income consumption rule? That is, does it pay (in a lifetime utility sense) to participate in a SMarT plan? We attempt to provide some rigorous answers to this question by employing a quantitative-theoretic model to perform dynamic welfare analysis, and our results tend to support the SMarT plan as a decent first approximation to the life-cycle/permanent-income rule. We also consider the problem of an altruistic employer seeking to maximize the lifetime utility of employees by appropriately choosing the default SMarT parameters in the face of employee heterogeneity in saving rates and uncertainty about whether they will actually stick with the plan. The employer's problem is augmented to include employee heterogeneity concerning risk taking, and we also consider the possibility that SMarT saving may be met with increased borrowing.

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This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

O. P. Attanasio , J. Banks , C. Meghir and G. Weber (1999) Humps and bumps in lifetime consumption. Journal of Business and Economic Statistics, 17(1): 2235.

J. Bullard and J. Feigenbaum (2007) A leisurely reading of the life-cycle consumption data. Journal of Monetary Economics, 54(8): 23052320.

M. Feldstein (1985) The optimal level of social security benefits. Quarterly Journal of Economics, 100(2): 303320.

T. S. Findley and F. Caliendo (2007) OutSMarTing the social security crisis. Public Finance Review, 35(6): 647668.

P. O. Gourinchas and J. A. Parker (2002) Consumption over the life cycle. Econometrica, 70(1): 4789.

R. H. Thaler and S. Benartzi (2004) Save More Tomorrow: using behavioral economics to increase employee saving. Journal of Political Economy, 112(1): 164187.

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Journal of Pension Economics & Finance
  • ISSN: 1474-7472
  • EISSN: 1475-3022
  • URL: /core/journals/journal-of-pension-economics-and-finance
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