Working Paper: NBER ID: w18565
Authors: Raj Chetty; John N. Friedman; Soren Leth-Petersen; Torben Nielsen; Tore Olsen
Abstract: Using 41 million observations on savings for the population of Denmark, we show that the impacts of retirement savings policies on wealth accumulation depend on whether they change savings rates by active or passive choice. Subsidies for retirement accounts, which rely upon individuals to take an action to raise savings, primarily induce individuals to shift assets from taxable accounts to retirement accounts. We estimate that each $1 of government expenditure on subsidies increases total saving by only 1 cent. In contrast, policies that raise retirement contributions if individuals take no action - such as automatic employer contributions to retirement accounts - increase wealth accumulation substantially. We estimate that approximately 15% of individuals are "active savers" who respond to tax subsidies primarily by shifting assets across accounts. 85% of individuals are "passive savers" who are unresponsive to subsidies but are instead heavily influenced by automatic contributions made on their behalf. Active savers tend to be wealthier and more financially sophisticated. We conclude that automatic contributions are more effective at increasing savings rates than subsidies for three reasons: (1) subsidies induce relatively few individuals to respond, (2) they generate substantial crowd-out conditional on response, and (3) they do not increase the savings of passive individuals, who are least prepared for retirement.
Keywords: retirement savings; subsidies; automatic contributions; Denmark; crowdout
JEL Codes: E21; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| subsidies for retirement accounts (H20) | total saving (E21) |
| automatic employer contributions (J32) | active savers (D14) |
| automatic employer contributions (J32) | passive savers (D14) |
| introduction of the MSP (Y20) | total saving (E21) |
| subsidies for retirement accounts (H20) | crowdout (D26) |
| active decision-making (D91) | total saving (E21) |
| automatic employer contributions (J32) | total wealth accumulation (E21) |