Default Options and Retirement Saving Dynamics

From Taha Choukhmane

I document that employees offset the short-run positive effect of auto-enrollment in retirement plans by saving less in the future. Consequently, a structurally-estimated lifecycle model predicts that the long-term effect of auto-enrollment on wealth is negligible except at the bottom of the earnings distribution. The observed inertia at the savings default is explained by an optout cost of around $250. My estimate is smaller than the thousands of dollars estimated in previous studies because non-autoenrolled workers can compensate for not contributing now by contributing more later. Auto-enrollment improves welfare if the policymaker is paternalistic or has strong redistributive preferences.