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Saving Incentives for Low- and Middle-Income Families: Evidence from a Field Experiment with H&R Block

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  • Duflo, Esther
  • Gale, William
  • Liebman, Jeff
  • Orszag, Peter
  • Saez, Emmanuel

Abstract

This paper analyzes the effects of a large randomized field experiment carried out with H&R Block, offering matching incentives for IRA contributions at the time of tax preparation. About 14,000 H&R Block clients, across 60 offices in predominantly low and middle-income neighbourhoods in St. Louis, were randomly offered a 20 percent match on IRA contributions, a 50 percent match, or no match (the control group). The evaluation generates two main findings. First, higher match rates significantly raise IRA participation and contributions. Take-up rates were 3 percent for the control group, 8 percent in the 20 percent match group, and 14 percent in the 50 percent match group. Average IRA contributions (including non-contributors, excluding the match) for the 20 percent and 50 percent match groups were 4 and 7 times higher than in the control group, respectively. Second, several additional findings are inconsistent with the full information, rational-saver model. In particular, we find much more modest effects on take-up and amounts contributed from the existing Saver’s Credit, which provides an effective match for retirement saving contributions through the tax code; we suspect that the differences may reflect the complexity of the Saver's Credit as enacted, and the way in which its effective match is presented. Taken together, our results suggest that the combination of a clear and understandable match for saving, easily accessible savings vehicles, the opportunity to use part of an income tax refund to save, and professional assistance could generate a significant increase in contributions to retirement accounts, including among middle- and low-income households. This strategy would not, however, produce contribution rates anywhere near 100 percent.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5332.

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Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5332

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Keywords: field experiment; retirement savings;

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  1. Burman, Leonard E. & Gale, William G. & Hall, Matthew & Orszag, Peter R., 2004. "Distributional Effects of Defined Contribution Plans and Individual Retirement Arrangements," National Tax Journal, National Tax Association, vol. 57(3), pages 671-701, September.
  2. James J. Choi & David Laibson & Brigitte C. Madrian, 2005. "$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans," NBER Working Papers 11554, National Bureau of Economic Research, Inc.
  3. Andrea L. Kusko & James M. Poterba & David W. Wilcox, 1994. "Employee Decisions with Respect to 401(k) Plans: Evidence From Individual-Level Data," NBER Working Papers 4635, National Bureau of Economic Research, Inc.
  4. Gary V. Engelhardt & Anil Kumar, 2004. "Employer Matching and 401(k) Saving: Evidence from the Health and Retirement Study," Working Papers, Center for Retirement Research at Boston College 2004-18, Center for Retirement Research.
  5. Eric M. Engen & William G. Gale & John Karl Scholz, 1996. "The Illusory Effects of Saving Incentives on Saving," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 113-138, Fall.
  6. Eckel, Catherine C. & Grossman, Philip J., 2003. "Rebate versus matching: does how we subsidize charitable contributions matter?," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 681-701, March.
  7. James M. Poterba & Steven F. Venti & David A. Wise, 1996. "How Retirement Saving Programs Increase Saving," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 91-112, Fall.
  8. James J. Choi & David Laibson & Brigitte C. Madrian, 2005. "$100 Bills on the Sidewalk: Suboptimal Saving in 401(k) Plans," Levine's Bibliography 784828000000000649, UCLA Department of Economics.
  9. Papke, Leslie E. & Poterba, James M., 1995. "Survey evidence on employer match rates and employee saving behavior in 401(k) plans," Economics Letters, Elsevier, vol. 49(3), pages 313-317, September.
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