The Adequacy of Retirement Savings Is an Important Public Policy $$59 1/ 2$$

Essay

The adequacy of retirement savings is an important public policy issue. Many tax-favored retirement plans impose tax penalties on any withdrawals from retirement savings plans before a worker reaches a particular age, such as $$59 1/ 2$$ . However, in some cases workers at an earlier age get access to their savings with no withdrawal penalties when they change employers. Many workers in this situation spend their accumulated retirement savings on current consumption. Assuming that the worker is merely changing jobs with no change in expected future income, is this behavior consistent with the life-cycle/permanent-income hypothesis? Explain why or why not and offer an alternative explanation based on behavioral economics.