savings and investment after class

savings and investment after class - Perhaps the 2 biggest...

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Perhaps the 2 biggest applied problems relating to choice over time are health (choosing to forego unhealthy foods, exercise, etc. now for benefits in the long run) and savings. Thinking about the savings decisions of adults and wanting to improve them is, for many, a goal in and of itself. Many people report that they don’t feel they save enough or end up living on much smaller levels of consumption later in life, so we might want to fix that. Even if your bent is more libertarian and you don’t want to try to solve someone else’s problems, there are many reasons why you might worry about others’ retirement decisions. 1
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The defined benefits style is hard to keep solvent as life expectancies rise and population growth rates slow, as is the case in many wealthy nations. Moving to more defined contribution plans puts incentives in the right place by giving people responsibility for their own retirement and encourages investment. For example, as life expectancies grow and population growth slows, how will the US keep the pay-as-you-go Social Security system solvent? As a start, the US has enacted several tax incentives for saving for one’s retirement in special defined contribution accounts. Employers who offer such accounts may also get tax benefits if the plan meets the standards of the Employee Retirement Income Security Act (ERISA). Many employers offer as a benefit “matching” employee contributions into a defined contributions plan. At the firm level, there are also incentives to get employees to use defined contribution programs. For example, ERISA requires plans not be “top heavy” with too many benefits going to “key employees.” So, if the management at a manufacturing plant all contribute to their 401k plans, but the line workers don’t, the firm’s plan won’t be in compliance with ERISA and they could lose its special tax status. It is this motivation that has led to firms spending on research into how people make their retirement savings decisions, which in turn contributes to why this area of research is among the most active in intertemporal choice. 2
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Over the last 3 decades, the shift has been dramatic. I’m surprised it hasn’t been more chaotic. 3
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The movement toward defined contribution opens up new responsibilities for a large number of individuals who are unsure of how much and where to invest. Many people have no idea how to make these decisions and look to cues from coworkers, financial advisors, and even implicit cues in the default settings of their plans. 4
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smooth consumption to some extent, including saving during the peak earning years so as to have adequate consumption in retirement. 5
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This note was uploaded on 04/04/2012 for the course PSYC 265 taught by Professor Jasondana during the Spring '12 term at UPenn.

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savings and investment after class - Perhaps the 2 biggest...

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