We present a rule-of-thumb consumption model with participation in a ``Save More TomorrowTM'' (SMarT) plan, and we analytically derive the fraction of life-cycle wage increases that must be saved to offset a reduction in social security benefits resulting from an aging population (holding taxes fixed and maintaining a balanced social security budget). We find that this ``critical'' SMarT rate is quite low, and much lower than the rate that participants actually used in real-world pilot implementations. This finding generally continues to hold even if wage growth is slow, even if the real return on private saving is low or extremely volatile, and even if enrollment in a SMarT plan is delayed until late in the life cycle. Moreover, we show that participation in a SMarT plan can improve lifetime utility.
Attanasio, Orazio.1999. Consumption. In Handbook of Macroeconomics (Volume 1B), John B. Taylor and Michael Woodford, eds., 741-812. Amsterdam, The Netherlands: Elsevier Science B.V.
2.
Banks, James, Richard Blundell, and Sarah Tanner.1998. Is There a Retirement-Savings Puzzle?American Economic Review88(4): 769-788.
3.
Bernheim, B. Douglas, Jonathan Skinner, and Steven Weinberg .2001. What Accounts for the Variation in Retirement Wealth among U.S. Households?American Economic Review91(4): 832-857.
4.
Bullard, James B., and James Feigenbaum .2004. A Leisurely Reading of the Life-cycle Consumption Data. Working Paper 2003-017F, Federal Reserve Bank of St. Louis, St. Louis, MO.
5.
Caliendo, Frank, and David Aadland.2007. Short-Term Planning and the Life-Cycle Consumption Puzzle . Journal of Economic Dynamics and Control31(4): 1392-1415.
6.
Campbell, John Y.2001. Forecasting U.S. Equity Returns in the 21st Century. In Estimating the Real Rate of Return on Stocks Over the Long Term, Social Security Advisory Board, 3-10. Washington, DC.
7.
Campbell, John Y., and N. Gregory Mankiw .1989. Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence. In NBER Macroeconomics Annual 1989Olivier J. Blanchard and Stanley Fischer, eds., 185-216. Cambridge, MA: MIT Press.
8.
—————-. 1990. Permanent Income, Current Income, and Consumption. Journal of Business & Economic Statistics8(3): 265-279.
9.
Choi, James J., David Laibson, Brigitte C. Madrian, and Andrew Metrick.2006. Saving for Retirement on the Path of Least Resistance. In Behavioral Public Finance, Edward J. McCaffery and Joel Slemrod, eds., 304-352. New York, NY: Russell Sage Foundation Publications.
10.
Conlisk, John.1996. Why Bounded Rationality?Journal of Economic Literature34(2): 669-700.
11.
Diamond, Peter, and Peter Orszag.2005. Saving Social Security. Journal of Economic Perspectives19(2): 11-32.
12.
Dornbusch, Rudiger, Stanley Fischer, and Richard Startz.1998. Macroeconomics. 7th ed. New York, NY: Irwin/McGraw-Hill.
13.
Feigenbaum, James.2006. Can Mortality Risk Explain the Consumption Hump? Working paper, Department of Economics, University of Pittsburgh, Pittsburgh, PA.
14.
Feldstein, Martin.1985. The Optimal Level of Social Security Benefits. Quarterly Journal of Economics100(2): 303-320.
15.
Feldstein, Martin, and Jeffrey B. Liebman .2002. Social Security. In Handbook of Public Economics (Volume 4), Alan J. Auerbach and Martin Feldstein, eds., 2245-2325. Amsterdam , The Netherlands: Elsevier Science B.V.
16.
Goss, Stephen C.2005/2006. The Financial Outlook for the Social Security Disability Insurance Program. Social Security Bulletin66(3): 47-52.
17.
Gourinchas, Pierre-Olivier, and Jonathan A. Parker .2002. Consumption Over the Life Cycle. Econometrica70(1): 47-89.
18.
Helman, Ruth, Craig Copeland, and Jack VanDerhei.2006. Will More of Us Be Working Forever? The 2006 Retirement Confidence Survey. EBRI Issue Brief 292(April): 1-28.
19.
Kotlikoff, Laurence J.1979. Testing the Theory of Social Security and Life Cycle Accumulation . American Economic Review69(3): 396-410.
20.
Laibson, David.1997. Golden Eggs and Hyperbolic Discounting. Quarterly Journal of Economics112(2): 443-477.
21.
Lusardi, Annamaria.1999. Information, Expectations, and Savings for Retirement . In Behavioral Dimensions of Retirement Economics, Henry Aaron, ed., 81-115. Washington, D.C.: Brookings Institution Press and Russell Sage Foundation .
22.
Moore, Matt.2006. Automatic 401(k)s: A Win for Workers. National Center for Policy Analysis BriefAnalysis No. 567: 1-2.
23.
Smetters, Kent.2004. Is the Social Security Trust Fund a Store of Value?American Economic Review94(2): 176-181.
24.
Thaler, Richard H.1994. Psychology and Savings Policies. American Economic Review84(2): 186-192.
25.
Thaler, Richard H., and Shlomo Benartzi .2004. Save More TomorrowTM: Using Behavioral Economics to Increase Employee Saving. Journal of Political Economy112(1): 164-187.
26.
U.S. Congress.2004. Helping Americans Save: Hearing before the Joint Economic Committee. 108th Cong., 2nd sess. Washington, DC: GPO.
27.
U.S. Congress.2006. Pension Protection Act of 2006. HR4. 109th Cong., 2nd sess. Washington, DC: GPO.
