Written By: Tao Guoa and Michael Finke
Many who want to save more for retirement are tripped up by short-run temptations. Yet, some can still achieve their goals by using commitment devices to limit suboptimal behavior. Defined contribution plans in the United States resemble a commitment device because they are framed as savings for the future and penalize early withdrawals. This study investigates whether defined contribution plans are particularly useful for households that value the future and exhibit self-control problems. We find that participation in defined contribution plans has a greater impact on wealth accumulation among households with hyperbolic preferences. Our results suggest that those who find it difficult to resist short-run temptation can achieve long-run goals through the use of less liquid accounts and automated savings.