How Retirement Saving Programs Increase Saving

Poterba, James M.; Venti, Steven F.; Wise, David A.

doi:10.1257/jep.10.4.91

Cited by 289 publications

(132 citation statements)

References 11 publications

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“…Indeed, there is a contentious debate within the economics profession over this exact issue--whether 401(k) savings in general represents "new" savings, or relabeled "old" savings (see Poterba, Venti and Wise, 1996, and Engen, Gale and Scholz, 1995, for the two sides of this debate, and Hubbard and Skinner, 1996 and Bernheim, 1997 for a discussion of the debate). If individuals are merely reshuffling their assets, then there is an entire range of 401(k) participation rates that could be consistent with individual optimization.…”

Section: Explaining the Differential 401(k) Participation Rates Beformentioning

confidence: 99%

The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior

2000

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In this paper, we analyze the 401(k) savings behavior of employees in a large U.S. corporation before and after an interesting change in the company 401(k) plan. Before the plan change, employees were required to affirmatively elect participation in the 401(k) plan. After the plan change, employees were automatically and immediately enrolled in the 401(k) plan unless they made a negative election to opt out of the plan. Although none of the economic features of the plan changed, this switch to automatic enrollment dramatically changed the savings behavior of employees. We have two key findings. First, 401(k) participation is significantly higher under automatic enrollment. Second, the default contribution rate and investment allocation chosen by the company under automatic enrollment has a strong influence on the savings behavior of 401(k) participants. A substantial fraction of 401(k) participants hired under automatic enrollment exhibit what we call "default" behavior--sticking to both the default contribution rate and the default fund allocation even though very few employees hired before automatic enrollment picked this particular outcome. This "default" behavior appears to result both from participant inertia and from many employees taking the default as investment advice on the part of the company. Overall, these results are consistent with the notion that large changes in savings behavior can be motivated simply by the "power of suggestion." These findings have important implications for the optimal design of 401(k) savings plans as well as for any type of Social Security reform that includes personal accounts over which individuals have some amount of control. They also shed light more generally on the importance of both economic and non-economic factors in the determination of individual savings behavior.

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Section: Explaining the Differential 401(k) Participation Rates Beformentioning

confidence: 99%

The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior

2000

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“…In fact, Poterba, Venti, and Wise (1996) find exactly the opposite pattern when comparing 1984 and 1986. It is conceivable that *( some of the difficulties here could be linked to data problems, in which case the focus on financial wealth would be justified.…”

Section: And3mentioning

confidence: 87%

Rethinking Saving Incentives

Bernheim

1996

SSRN Journal

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I. IntroductionLow rates of saving in the United States have created widespread concern over investment, growth, the balance of payments, and the financial security of individual households. These concerns have prompted a variety of proposal designed to stimulate saving through tax incentives, ranging from narrowly focused tax-favored savings accounts, to broad-based consumption taxation. Before attempting to weigh the advantages and disadvantages of these proposals, it is important to marshall the available evidence, and review the lessons that economists have learned about the relation (or relations) between tax incentives and personal saving.This paper undertakes a review of the existing academic work in this area. It attempts both to evaluate the evidence, and to identify the important open questions. Although it does not include a full evaluation of any particular saving incentive proposal, it does identify relevant implications.The central conclusions of this review are as follows. First, the traditional life cycle hypothesis has had an excessive influence on the design and conceptualization of empirical investigations concerning the relation between taxation and saving. While other behavioral hypotheses are mentioned in the literature with increasing frequency, this usually occurs in the course of explaining an anomalous result, rather than at the stage of designing an empirical strategy, or even at the stage of evaluating results that do not appear to be anomalous from a lifecycle perspective. In part, this is no doubt attributable to the absence of sufficiently welldeveloped organizing principles for a compelling behavioral alternative. But even in the absence of an intellectually satisfying alternative, it is important to be aware of the potential for reaching misleading conclusions by imposing potentially false structure on the data. Second, there is little reason to believe that households increase their saving significantly in response to a generic increase in the after-tax rate of return. Since the evidence is quite poor, there is still considerable uncertainty on this point. However, it is difficult to identify any robust empirical pattern that is suggestive of a high elasticity., Third, the literature on the relation between Individual Retirement Accounts (IRAs) and personal saving is inconclusive. Studies that point to a large effect on personal saving contain identifiable biases that overstate this effect. Likewise, studies that find little or no effect on personal saving contain identifiable biases that understate the effect. Due to the nature of the IRA program and the characteristics of the available data, reliable estimation of the effect on personal saving may well be impossible. However, the IRA experience does provide reasonably strong evidence that households' responses to narrowly-focused tax incentives are governed, at least in part, by forces that are not considered in the traditional life cycle framework.Fourth, the available evidence on 401(k)s allows one to conclude with moderate ...

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“…17 Clearly, such a variable will be correlated with the choice to participate in a plan, so the remaining concern is whether the employer choice is correlated with the employee's taste for savings. Poterba et al (1996) argues that, conditional on income, 401(k) eligibility can be taken as exogenous, since the choice to offer a plan is made by the employer.…”

Section: The Estimation Methodsmentioning

confidence: 99%

“…Several papers (surveyed in Poterba et al, 1996) found that these plans tend to increase savings among plan 9 See Laibson et al (1998). 10 See Madrian and Shea (2001), Choi et al (2001Choi et al ( , 2004a.…”

Section: Related Literaturementioning

confidence: 99%

The impact of participation in employment-based retirement savings plans on material hardship

Heim¹,

Ramnath

2015

Journal of Pension Economics and Finance

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To contribute to a retirement plan (barring an increase in income), an individual must either reduce consumption or increase debt. Using data from the 2004 wave of the Survey of Income and Program Participation, we examine the extent to which contributing to 401(k)-type accounts leads to an increase in short-term financial difficulties, particularly among low-income individuals. After instrumenting for plan take-up, we find that contributing to a 401(k) plan appears to have a small positive impact on the presence of any material hardship and debt holding among the lowest income quintiles, though that effect diminishes further up the income distribution.JEL CODES: J32, E21, H31

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How Retirement Saving Programs Increase Saving

Cited by 289 publications

References 11 publications

The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior

The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior

Rethinking Saving Incentives

The impact of participation in employment-based retirement savings plans on material hardship

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