Welfare Gains of Auto-IRAs: a Theoretical Investigation

Erin Cottle Hunt, Elina Huang, Pooja Kumar, Joe Polifonte Lafayette College 202 Simon Center Easton, PA 18042 610-330-3373

Several states and cities in the United States have state-run automatic IRA programs that automatically enroll employees whose employers do not contribute to their retirement benefits. Policymakers hope these programs will help workers increase their lifetime savings, however, this assumes that individuals do not save enough already. We quantify the welfare effects of being enrolled in an automatic IRA for individuals of different education levels (no high school, high school graduates, college graduates). We used a two-stage life-cycle consumption model with a credit wedge to show the possible welfare effects of being enrolled in a state-run IRA program. Using a contribution rate of 3%, the welfare effects range from -0.98% to 0.25% in four different cases.

Using a simple rule-of-thumb model for non-optimizing individuals we find welfare effects to reach 5.93%. However, welfare effects decrease and eventually become negative as the private savings rate increases. A larger the private savings rate leads to smaller welfare effects from the IRA because individuals are already savings a larger percentage of their wages, so the forced savings in the IRA may force them to save so much that it crowds out consumption in their working years, leading to decreased overall utility.

Policy makers should keep in mind that the true impact on workers is dependent on borrowing constraints, if they choose to stay in program, and program fees.


Additional Abstract Information

Presenter: Pooja Kumar

Institution: Lafayette College

Type: Poster

Subject: Economics

Status: Approved

Time and Location

Session: Poster 5
Date/Time: Tue 12:30pm-1:30pm
Session Number: 4138