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“Precautionary Liquidity and Retirement Saving”, co-authored with Marie Brière (Amundi, Paris-Dauphine, and ULB) and James Poterba (MIT, NBER, and TIAA)
“Precautionary liquidity” manifests itself as a preference for holding assets in an accessible form not because of any current liquidity need, but because of a possible future need. Just as a precautionary saver will forego current consumption to build up a buffer stock of savings to prepare for possible future needs, a precautionary liquidity demander will avoid investment options with limited access, such as accounts that cannot be tapped until retirement, in favor of more liquid alternatives. We explore the role of precautionary demand for liquidity in retirement saving plans using data on participation and withdrawals from France. The dataset includes information on the saving choices of 680,392 active employees at 1,610 firms. French employers have wide discretion in structuring employee saving plans. All plans must offer medium-term investments, which cannot be accessed for five years. Employers may also offer long-term investments that cannot be accessed until retirement. We present three tests of whether participants value or avoid long-term options. The results are consistent with some workers having a precautionary demand for liquidity.