Since the early nineties, the Dutch tax system allows for a tax-favored form of risk free savings through employer- sponsored savings plans (ESSPs). Under some conditions and up to a certain amount, the contributions to this plan are tax-deductible, and the returns as well as the withdrawals are tax-free. This makes these plans extremely attractive, with real after-tax returns by far exceeding the returns to other financial assets such as risk free saving accounts or stocks and bonds. It suggests that those who have access to this type of savings should participate in them, provided they have some financial wealth that they can allocate to their own choice. Moreover, unless liquid financial wealth is too small, each household should hold the maximum amount to which the tax incentives apply. In this paper, we analyze household data on participation in ESSPs. For those who have access to the asset, we investigate the relationship between the ownership decision, the amount held, substitution of other savings, and background characteristics. We find that people who are likely to face binding liquidity constraints less often buy ESSPs and, if they buy them, more often use them as a substitute for other savings. Regular smokers often do not hold ESSPs, suggesting that some people in this group do not compose their portfolios optimally. The results question the assumption of rational financial decision making, which is typically maintained in theoretical as well as empirical work on savings and portfolio choice.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Gale, W.G. & scholz, J.K., 1992.
"IRAS and Household Saving,"
Papers
9244, Tilburg - Center for Economic Research.
Other versions:
Luigi Guiso & Tullio Jappelli, 2000.
"Household Portfolios in Italy,"
CSEF Working Papers
43, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
[Downloadable!]
Other versions:
Haliassos, Michael & Bertaut, Carol C, 1995.
"Why Do So Few Hold Stocks?,"
Economic Journal,
Royal Economic Society, vol. 105(432), pages 1110-29, September.
[Downloadable!] (restricted)