By Julia Le Bland and Almuth Scholl
We employ a life-cycle model with income risk to analyze how tax-deferred individual accounts affect households’ savings for retirement. We consider voluntary accounts as opposed to mandatory accounts with minimum contribution rates. We contrast add-on accounts with carve-out accounts that partly replace social security contributions. Quantitative results suggest that making add-on accounts mandatory has adverse welfare effects across income groups. Carve-out accounts generate positive welfare across all income groups but gains are lower for low income earners. Default investment rules in individual accounts have a modest impact on welfare.
As soon as you are mandating something, you are going to reduce welfare unless you overcome some sort of short-sightedness or there is a general equilibrium effect that warrants intervention. I see neither in this model, so it must be that replacing part of social security with a mandatory individual account allows to replace a mandate by a less bad one.