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Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark

  • Chetty, Raj

    (Harvard University)

  • Friedman, John N.

    (Harvard University)

  • Leth-Peterson, Soren

    (University of Copenhagen)

  • Nielsen, Torben Heien

    (Danish National Centre for Social Research)

  • Olsen, Tore

    (University of Copenhagen)

Do retirement savings policies--such as tax subsidies or employer-provided pension plans--increase total saving for retirement or simply induce shifting across accounts? We revisit this classic question using 45 million observations on wealth for the population of Denmark. We find that a policy's impact on wealth accumulation depends on whether it changes savings rates by active or passive choice. Tax subsidies, which rely upon individuals to take an action to raise savings, have small impacts on total wealth. We estimate that each $1 of tax expenditure on subsidies increases total saving by 1 cent. In contrast, policies that raise retirement contributions if individuals take no action--such as automatic employer contributions to retirement accounts--increase wealth accumulation substantially. Price subsidies only affect the behavior of active savers who respond to incentives, whereas automatic contributions increase the savings of passive individuals who do not reoptimize. We estimate that approximately 85% of individuals are passive savers. The 15% of active savers who respond to price subsidies do so primarily by shifting assets across accounts rather than reducing consumption. These individuals are also more likely to offset changes in automatic contributions and have higher wealth-income ratios. We conclude that automatic contributions are more effective at increasing savings rates than price subsidies for three reasons: (1) subsidies induce relatively few individuals to respond, (2) they generate substantial crowd-out conditional on response, and (3) they do not influence the savings behavior of passive individuals, who are least prepared for retirement.

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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp13-002.

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Date of creation: Jan 2013
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Handle: RePEc:ecl:harjfk:rwp13-002
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