Government Policy and Labor Supply with Myopic or Targeted Savings Decisions

Louis Kaplow

Chapter in NBER book Tax Policy and the Economy, Volume 29 (2015), Jeffrey R. Brown, editor (p. 159 - 193)
Conference held September 18, 2014
Published in December 2015 by University of Chicago Press
© 2015 by the National Bureau of Economic Research
in The Tax Policy and the Economy Series

A central justification for social insurance and for other policies aimed at retirement savings is that individuals may fail to make adequate provision during their working years. Much research has focused on myopia and other behavioral limitations. Yet little attention has been devoted to how these infirmities, and government policies to rectify them, influence labor supply. This linkage could be extremely important in light of the large pre-existing distortion due to income and consumption taxation and income-based transfer programs. For example, might myopic individuals, as a first approximation, view payroll taxes and other withholding to fund retirement savings as akin to an income tax, while largely ignoring the distant future retirement benefits that they fund? If so, the distortion of labor supply may be many times higher than otherwise, making savings-promotion policies much more costly than appreciated. Or consider what may be the labor supply implications for an individual who is defaulted into higher savings and, as a consequence, sees concomitantly lower take-home pay. This essay offers a preliminary, conceptual exploration of these questions. In most of the cases considered, savings policies do not act purely like a tax despite individuals’ non-optimizing savings behavior, and in some cases labor supply actually is raised, not lowered, in which event policies that boost savings may be significantly more welfare-enhancing than recognized. Accordingly, there is a compelling need for empirical exploration of the interaction between nonoptimal savings behavior and labor supply.

download in pdf format
   (250 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.1086/683367

This chapter first appeared as NBER working paper w21109, Government Policy and Labor Supply with Myopic or Targeted Savings Decisions, Louis Kaplow
Users who downloaded this chapter also downloaded* these:
Heim, Lurie, and Simon The Impact of the Affordable Care Act Young Adult Provision on Labor Market Outcomes: Evidence from Tax Data
Feldstein Raising Revenue by Limiting Tax Expenditures
Bulman and Hoxby The Returns to the Federal Tax Credits for Higher Education
Mulligan The New Full-time Employment Taxes
Kaplow w12452 Myopia and the Effects of Social Security and Capital Taxation on Labor Supply
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us