Active vs. Passive Decisions and Crowdout in Retirement Savings Accounts: Evidence from Denmark

The U.S. government subsidizes retirement saving through 401(k) plans with $82.7 billion in tax expenditures annually, but the question of whether these tax incentives are effective in increasing saving remains unanswered. Using longitudinal U.S. Social Security Administration data on tax-deferred earnings linked to the Survey of Income and Program Participation, the project examines whether the "catch-up provision," which allows workers age 50 and over to contribute more to their 401(k) plans, has been effective in increasing earnings deferrals. The study finds that annual contributions increased by $818 more among age-50-plus individuals constrained by the 401(k) tax-deferral limits relative to similar workers just under age 50, suggesting that constrained individuals respond to tax incentives. For this group, the elasticity of retirement savings to the tax incentive is relatively high: a 1-percentage-point increase in the tax-deferred limit leads to a 0.2 percentage-point increase in 401(k) contributions.But barely 1 percent of lower-saving participants took advantage of catch-up contributions, suggesting that raising the 401(k) limit is not likely to be a broad-based solution to retirement saving shortfalls.

Section: Resultssupporting

confidence: 64%

Section: Introductionmentioning

confidence: 99%

Do Tax Incentives Increase 401(K) Retirement Saving? Evidence from the Adoption of Catch-Up Contributions

Rutledge

Vitagliano

et al. 2014

“…[CFL14] show that only active savers, who are wealthier and better prepared for retirement, respond to tax subsidies for retirement. Moreover, these active savers respond by shifting funds from taxable accounts into retirement accounts, rendering the subsidies ineffective.…”

Section: Attempts To Affect Saving Ratesmentioning

confidence: 99%

Information Architecture and Intertemporal Choice: A Randomized Field Experiment in the United States

Levi

2014

Professor Ivo Welch, ChairIn a randomized field experiment, I show that information architecture significantly affects individuals' spending and savings behavior. I present users of a large online account aggregation provider with a personalized financial index. This index represents the inflation-protected, lifetime monthly cash flow that they can obtain, given their personal financial and demographic information and current market prices. Users receiving this information tool reduce their spending by 10.7% relative to a control group. This effect is sensitive to the description of the index using a consumption frame rather than an investment frame and to the presentation of an explicit comparison between the index and historical spending levels. Further, spending reductions are primarily in large, infrequent transactions. This experiment is the first to directly affect overall spending behavior and to demonstrate the importance of information architecture in that context. It demonstrates the potential of low cost digital information tools to impact financial behavior on a large scale.ii The dissertation of Yaron Levi is approved.

“…For example, there is robust evidence that changing the default in the decision whether to contribute to a retirement account or not is very e↵ective in increasing savings (Madrian and Shea 2001;Thaler and Benartzi 2004;Chetty et al 2014).…”

Section: Introductionmentioning

confidence: 99%

Do Savings Increase in Response to Salient Information About Retirement and Expected Pensions?

Dolls¹,

Doerrenberg²,

Peichl³

et al. 2016

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Abstract How can retirement savings be increased? We explore a unique policy change in the context of the German pension system to study this question. As of 2004, the German pension authority started to send out annual letters providing detailed and comprehensible information about the pension system and individual expected pension payments. This reform did not change the level of pensions, but only manipulated the knowledge about and salience of expected pension payments. Using German tax return data, we exploit two discontinuities in the age cuto↵s of receiving such a letter to study their e↵ects on private retirement savings. Our results show that the letters increase private retirement savings. The e↵ects are fairly sizable and persistent over several years. We further show that the letter increases labor earnings, and that the increase in savings partly crowds out charitable donations. Moreover, we present evidence suggesting that both information and salience drive the savings e↵ect. Our paper adds to a recent literature showing that policies that go beyond the traditional neoclassical reasoning can be powerful to increase savings rates.JEL Classification: H55, H24, J26, D14