Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark

TY - JOUR

T1 - Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark

AU - Nielsen, Torben Heien

AU - Leth-Petersen, Søren

AU - Chetty, Raj

AU - Friedman, John N.

AU - Olsen, Tore

PY - 2014/8/1

Y1 - 2014/8/1

N2 - Using 41 million observations on savings for the population of Denmark, we show that the effects 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 on 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: (i) subsidies induce relatively few individuals to respond, (ii) they generate substantial crowd-out conditional on response, and (iii) they do not increase the savings of passive individuals, who are least prepared for retirement. JEL Codes: H2, H3.

AB - Using 41 million observations on savings for the population of Denmark, we show that the effects 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 on 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: (i) subsidies induce relatively few individuals to respond, (ii) they generate substantial crowd-out conditional on response, and (iii) they do not increase the savings of passive individuals, who are least prepared for retirement. JEL Codes: H2, H3.

U2 - 10.1093/qje/qju013

DO - 10.1093/qje/qju013

M3 - Journal article

SN - 0033-5533

VL - 129

JO - Quarterly Journal of Economics

JF - Quarterly Journal of Economics

IS - 3

ER -