| “The Optimal Early-Withdrawal Penalty on Tax-deferred Saving Accounts” |
Tax-deferred savings accounts (TDA) are commonly used to encourage retirement savings. While TDA have similar institutional settings in many countries, the penalty rates on assets withdrawal before retirement differ significantly. Through an overlapping-generations model calibrated to the U.S. economy, this paper shows that the optimal early withdrawal penalty rate is 50.4%, which is substantially higher than the 10% in the current regulation. Adopting the optimal penalty rate will obtain a welfare gain equivalent to a 2.16% increase in per period consumption. A reform with income-dependent early withdrawal penalty will improve welfare equivalent to a 2.90% increase in per period consumption. Experiment results indicate that households facing negative income shocks over withdraw TDA assets for consumption.
Sensitivity test show that the welfare gain from an income-dependent penalty is more robust to the assumption on household's time inconsistent preferences, and it provides four times more welfare gain than a constant penalty rate if households are naivete.
JEL Classification: D14, D91, E21, H24
JEL Classification: D14, D91, E21, H24