Does Borrowing Undo Automatic Enrollment’s Effect on Savings?
Automatic enrollment in retirement savings plans has been shown to increase participation and average savings rates in these plans. But how much of these increases are offset by borrowing outside the plan? We study a natural experiment created when the U.S. Army began automatically enrolling its newly hired civilian employees into the Thrift Savings Plan (TSP) at a default contribution rate of 3% of income. We match these employees’ payroll records to their credit reports. We find that 4½ years after hire, as a percent of first-year annualized salary, automatic enrollment raises cumulative TSP contributions by 6% at the mean, 17% at the 25th percentile, and 32% at the 10th percentile. However, automatic enrollment’s effect on wealth net of debt is only 3% at the mean and 8% at the 10th percentile. There is relatively little crowd-out at the 25th percentile, where the net wealth effect is 15%.
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