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

Abstract

Using 41 million observations on savings for the population of Denmark, we show that the impacts of retirement savings policies on wealth accumulation depend on whether they change savings rates by active or passive choice. Subsidies for retirement accounts, which rely upon individuals to take an action to raise savings, primarily induce individuals to shift assets from taxable accounts to retirement accounts. We estimate that each $1 of government expenditure on subsidies increases total saving by only 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. We estimate that approximately 15% of individuals are "active savers" who respond to tax subsidies primarily by shifting assets across accounts. 85% of individuals are "passive savers" who are unresponsive to subsidies but are instead heavily influenced by automatic contributions made on their behalf. Active savers tend to be wealthier and more financially sophisticated. We conclude that automatic contributions are more effective at increasing savings rates than 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 increase the savings of passive individuals, who are least prepared for retirement. * We thank Do retirement savings policies-such as tax subsidies, employer-provided pensions, and savings mandates-raise total wealth accumulation or simply induce individuals to shift savings across accounts? Despite extensive research, the answer to this question remains unclear, largely due to limitations in data and research designs (Bernheim, 2002). In this paper, we revisit this question using a panel data set with 41 million observations on savings in both retirement and non-retirement accounts for the population of Denmark. We organize our empirical analysis using a stylized model in which the government uses two policies to raise saving: a price subsidy and an automatic contribution that puts part of an individual's salary in a retirement account. We analyze the impacts of these policies on two types of agents: active savers and passive savers. Active savers make savings decisions by maximizing utility, taking into account the subsidies and automatic contributions. Passive savers make fixed pension contributions that are invariant to the automatic contribution and subsidy. The model predicts that automatic contributions should have no impact on total saving-total flows into non-retirement and retirement accounts-for active savers who can fully offset the automatic contribution by reducing their own voluntary pension contributions. In contrast, the impact of automatic contributions on total saving is ambiguous for passive savers. If passive savers absorb the reduction in disposable income due to the automatic contribution by maintaining a fixed consumption plan and running down their bank balanc...

What happens when employers are obliged to nudge? Automatic enrolment and pension saving in the UK

“…It is possible that increases in saving in a workplace pension are offset by reduced saving elsewhere, principally in 'personal pensions' (pensions arranged completely independently of the employer), or in other savings accounts or assets. However, given that one of the reasons that automatic enrolment is thought to increase pension saving is procrastination (which leads to people not joining in the absence of automatic enrolment and not leaving once they are enrolled), we may not think that many individuals are 'active' enough to reduce their other saving in reaction to automatic enrolment (as is found by Chetty et al (2014)). …”

“…Chetty et al (2014) find that only 15% of people respond actively to automatic pensions contributions (by reducing other saving), implying that, for most people, higher pension saving due to automatic contributions is not offset by reductions in other saving.…”

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“…There is little evidence on the magnitude of these potential offsets, although a recent study by Chetty et al (2014) on the impact of a short-term mandatory savings program in Denmark suggests that the extent of crowd out for that program was quite limited.…”

Do lottery payments induce savings behavior? Evidence from the lab

“…Chetty, Friedman, Leth-Petersen, Nielsen, and Olsen (2012) present evidence that the impact of targeted savings policies is larger if they affect passive choice versus active choice. The policy interest in this question is largely driven by the observation that many low-and moderate-income households do not have adequate savings.…”