Precautionary Liquidity and Retirement Saving

There is a large debate on the optimal degree of savings’ liquidity in retirement systems. Liquid retirement savings allow people to flexibly respond to life events such as income shocks but can also lead to undersaving.

This paper analyses the saving choices of 650,000 employees at more than 1,500 French firms in French employee savings plans and shows three evidence of “precautionary liquidity” (preference for holding assets in an accessible form not because of current liquidity need but because of a possible future need): (1) restricting liquidity of the default option reduces default take-up and plan participation ; (2) Employees try to avoid the illiquid saving option, unless it is matched at a large match rate ; (3) When making early withdrawals, they prioritize the liquidation of the illiquid account.

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