IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Subsidies vs. Nudges: Which Policies Increase Saving the Most?

Listed author(s):
  • Raj Chetty
  • John N. Friedman
  • Soren Leth-Petersen
  • Torben Heien Nielsen
  • Tore Olsen

The federal government provides generous tax subsidies for retirement saving in 401(k)s and IRAs. The subsidies are designed to increase household saving and retirement income security, important national goals. The estimated cost, however, exceeds $100 billion a year in lost revenue to the Treasury. Given the nation’s severe budgetary pressures, it is critical to know how effective these subsidies are in raising household saving and whether other approaches would be more cost-effective. The ability to answer these questions has been limited by inadequate U.S. data on household saving. In particular, it is hard to know whether tax subsidies encourage families to save more, or simply shift money they would otherwise save into tax-advantaged retirement accounts. The same is true for “automatic” saving, such as defaults in 401(k) plans, which increase retirement saving if individuals take no action. While defaults have been shown to increase retirement saving, is this increase offset by reduced saving in taxable accounts or an increase in debt, leav-ing total household saving unchanged? This brief, based on a recent study, uses high-quality Danish data to address these questions. It assesses the effect of tax subsidies and automatic contributions on retirement saving and total household saving. The Danish retirement system and patterns of retirement saving are similar to those in the United States. The effect of retirement saving policies on total household saving should be similar as well, making the findings relevant to current U.S. policy discussions. This brief proceeds as follows. The first section introduces the problem of evaluating policies designed to increase retirement saving. The second section describes the data and basic methodology used in the analysis. The third section presents findings on the effect of tax subsidies on retirement saving. The fourth section presents findings on the effect of automatic saving. The fifth section offers an explanation of these findings based on how these policies affect two types of individuals – “active” and “passive” savers. The final section concludes that an expansion of automatic saving could produce much larger increases in household saving, at lower fiscal cost, than current tax subsidies for retirement saving.

If you experience problems downloading a file, check if you have the proper application to view it first. 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.

File URL:
Download Restriction: no

Paper provided by Center for Retirement Research in its series Issues in Brief with number ib2013-3.

in new window

Length: 7 pages
Date of creation: Mar 2013
Handle: RePEc:crr:issbrf:ib2013-3
Contact details of provider: Postal:
Hovey House, 140 Commonwealth Avenue, Chestnut Hill, MA 02467

Phone: (617) 552-1762
Fax: (617) 552-0191
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:crr:issbrf:ib2013-3. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Grzybowski)

or (Christopher F Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.