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

Raj Chetty, John N. Friedman, Søren Leth-Petersen, Torben Nielsen

NBER Retirement Research Center Paper No. NB 12-04
Issued in September 2012

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 a panel dataset with 50 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. Policies such as tax subsidies that rely upon individuals to take an action to raise savings have small impacts on total wealth. 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. Intuitively, price subsidies only affect the behavior of active savers who optimize their portfolios with respect to policy, whereas automatic contributions increase 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 by reallocating savings across accounts. Overall, our results imply that automatic contributions may be more effective at increasing total retirement savings than price subsidies for two reasons: (1) subsidies induce relatively few individuals to respond, and (2) they generate substantial crowdout conditional on response.

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