TY - JOUR AU - Chetty,Raj AU - Friedman,John N. AU - Leth-Petersen,Soren AU - Nielsen,Torben AU - Olsen,Tore TI - Active vs. Passive Decisions and Crowdout in Retirement Savings Accounts: Evidence from Denmark JF - National Bureau of Economic Research Working Paper Series VL - No. 18565 PY - 2012 Y2 - November 2012 UR - http://www.nber.org/papers/w18565 L1 - http://www.nber.org/papers/w18565.pdf N1 - Author contact info: Raj Chetty Department of Economics Harvard University 1805 Cambridge St. Cambridge, MA 02138 Tel: 617-744-9492 E-Mail: chetty@fas.harvard.edu John N. Friedman Harvard Kennedy School Taubman 356 79 JFK St. Cambridge, MA 02138 Tel: 617/233-6965 Fax: 617/496-1722 E-Mail: john_friedman@harvard.edu Soren Leth-Petersen Department of Economics University of Copenhagen Oster Farimagsgade 5 Building 26 DK-1353 Copenhagen K Denmark Tel: +45 35323084 E-Mail: Soren.Leth-Petersen@econ.ku.dk Torben Nielsen University of Copenhagen Department of Economics Øster Farimagsgade 5, Building 25 DK-1353 Copenhagen K E-Mail: torben.heien.nielsen@econ.ku.dk Tore Olsen University of Copenhagen and CAM E-Mail: tolsen@fas.harvard.edu AB - 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. ER -