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Does it pay to be SMarT?*

Published online by Cambridge University Press:  08 July 2008

T. SCOTT FINDLEY  and
FRANK N. CALIENDO
T. SCOTT FINDLEY
Affiliation:
Department of Economics, University of New Mexico, Albuquerque, NM, USAe-mail: tfindley@unm.edu
FRANK N. CALIENDO
Affiliation:
Department of Economics and Finance, Utah State University, UT, USA
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Abstract

The Save More Tomorrow™ (or SMarT) plan has proven effective in raising employee saving rates and appears to be popular among participants and the media. An important question has remained on the minds of economists despite this success: just how close does the prescriptive SMarT plan come to approximating the normative life-cycle/permanent-income consumption rule? That is, does it pay (in a lifetime utility sense) to participate in a SMarT plan? We attempt to provide some rigorous answers to this question by employing a quantitative-theoretic model to perform dynamic welfare analysis, and our results tend to support the SMarT plan as a decent first approximation to the life-cycle/permanent-income rule. We also consider the problem of an altruistic employer seeking to maximize the lifetime utility of employees by appropriately choosing the default SMarT parameters in the face of employee heterogeneity in saving rates and uncertainty about whether they will actually stick with the plan. The employer's problem is augmented to include employee heterogeneity concerning risk taking, and we also consider the possibility that SMarT saving may be met with increased borrowing.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 9 , Issue 3 , July 2010 , pp. 321 - 344
Copyright
Copyright © Cambridge University Press 2008

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