TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, May 7, 2013

Chetty Presents Active vs. Passive Decisions and Retirement Savings Today at NYU

ChettyRaj Chetty (Harvard University, Department of Economics) presents Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

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 savings for the population of Denmark. We find that a policy's impact on total savings depends critically 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 savings automatically even if individuals take no action -- such as employer-provided pensions or automatic contributions to retirement accounts -- increase wealth accumulation substantially. Price subsidies only aff ect the behavior of active savers who respond to incentives, whereas automatic contributions increase savings of passive individuals who do not reoptimize. We estimate that 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 also o ffset changes in automatic contributions and have higher wealth-income ratios. We conclude that automatic contributions are more e ective at increasing total retirement savings than price subsidies for three reasons: (1) subsidies induce relatively few individuals to respond, (2) they generate substantial crowdout 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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