Active vs. Passive Decisions and Crowd-out in Retirement Savings - - PowerPoint PPT Presentation

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

Raj Chetty, Harvard and NBER John N. Friedman, Harvard and NBER Soren Leth-Petersen, Univ. of Copenhagen and SFI Torben Nielsen, Univ. of Copenhagen and SFI Tore Olsen, Univ. of Copenhagen and CAM April 2013

Question

Do retirement savings policies – e.g., tax subsidies or employer-provided pensions – raise total wealth accumulation? Or simply induce shifting across accounts? Central questions for understanding optimal design of retirement policies Existing evidence mixed [Hubbard 1984, Skinner and Feenberg 1990, Poterba,

Venti, Wise 1996, Engen, Gale, Scholz 1996, Engelhardt and Kumar 2007, Gelber 2010]

Largely due to limitations in data and research designs [Bernheim 2002]

Overview

We estimate crowd-out in retirement savings accounts using Danish tax data 45 million observations on savings from administrative sources We analyze two types of policies Automatic contributions by government or firms to workers’ retirement savings accounts Price subsidies for retirement savings Main finding: Automatic contributions raise total savings much more than price subsidies Interpret this result through a model of active and passive choice

Consumers can use their income (Y) for 3 purposes: Consumption (C) Non-Pension Savings (S) Pension Savings (P) Government has two policies: Automatic pension contributions (M) Subsidy for pension contributions (q) Budget constraint (ignoring corners):

Conceptual Framework

C1  Y  S  P  M C2  1  rS  1  r  P  M

Impacts of Government Policies on Saving for Active vs. Passive Savers

Au Autom

• mat

atic ic Contributio ntribution Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Active Savers No No Passive Savers Yes Uncertain

Impacts of Government Policies on Saving for Active vs. Passive Savers

Au Autom

• mat

atic ic Contributio ntribution Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Active Savers No No Passive Savers Yes Uncertain Prior work (e.g., Madrian and Shea 2001, Choi et al. 2004) suggests that automatic contribs. raise total pension contributions

Impacts of Government Policies on Saving for Active vs. Passive Savers

But impact of auto. contrib. on total saving unclear for passive agents Au Autom

• mat

atic ic Contributio ntribution Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Active Savers No No Passive Savers Yes Uncertai ertain

Impacts of Government Policies on Saving for Active vs. Passive Savers

Au Autom

• mat

atic ic Contributio ntribution Price ice Subsidy sidy Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Active Savers No No Yes Uncertain Passive Savers Yes Uncertain No No

Impacts of Government Policies on Saving for Active vs. Passive Savers

Au Autom

• mat

atic ic Contributio ntribution Price ice Subsidy sidy Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Active Savers No No Yes Uncertain Passive Savers Yes Uncertain No No Prior work on match rates (e.g. Duflo et al. 2006, Engelhardt and Kumar 2007) suggests that subsidies increase pension saving

Impacts of Government Policies on Saving for Active vs. Passive Savers

Au Autom

• mat

atic ic Contributio ntribution Price ice Subsidy sidy Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Active Savers No No Yes Uncertai ertain Passive Savers Yes Uncertain No No But impact of price subsidy on total saving again unclear

Impacts of Government Policies on Saving for Active vs. Passive Savers

Au Autom

• mat

atic ic Contributio ntribution Price ice Subsidy sidy Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Active Savers No No Yes Uncertain Passive Savers Yes Uncertain No No Data ? ? ? ?

Outline

1.

Test the four predictions

2.

Estimate fraction of active vs. passive savers

3.

Analyze heterogeneity to test active vs. passive choice mechanism

Passive x

response to M and t 1

Data Active

Institutional Background

Denmark has three major retirement savings policies similar to U.S.:

1.

Tax-deferred individual savings accounts

2.

Tax-deferred employer savings accounts

3.

Defined benefit public pension system Fixed benefit of DKr 140,000 (US $23,000) with earnings test based on income

Universe of Danish income tax returns, 1994-2009 Sample restrictions: (1) not self employed and (2) age 18-60 4.3 million unique individuals 45 million observations on savings and liabilities Data on household balance sheet from 3rd party reports to tax authority

Data and Sample Definition

Part 1 Impacts of Automatic Contributions

Do automatic contributions to retirement accounts affect individuals’ total saving? Ideal experiment: randomize automatic contributions holding fixed total compensation ($100 increase in pension + $100 reduction in earnings) Two quasi-experimental research designs:

1.

Variation in employer-provided pensions

2.

Government mandatory savings plan Both designs yield similar results; focus today on employer changes

Impact of Automatic Contributions

Research design: event studies around job changes Compare impacts of sharp increases or decreases in employer pension contributions at the time of job change Two potential concerns with this design Job switches may be endogenous Total compensation changing as well; need to net out income effect We address both concerns after presenting baseline results

Impacts of Employer-Provided Pensions

Contribution or Savings Rate (% of income) Year Relative to Firm Switch Δ Employer Pensions = 5.65 2 6 10 14 18

• 5

5 Event Study around Switches to Firm with >3% Increase in Employer Pension Rate Individuals with Positive Pension Contributions or Savings Prior to Switch Employer Pensions Total Pensions

Contribution or Savings Rate (% of income) Year Relative to Firm Switch Δ Employer Pensions = 5.65 Δ Total Pensions = 4.86 2 6 10 14 18

• 5

5 Employer Pensions Total Pensions Event Study around Switches to Firm with >3% Increase in Employer Pension Rate Individuals with Positive Pension Contributions or Savings Prior to Switch

Contribution or Savings Rate (% of income) Year Relative to Firm Switch Δ Employer Pensions = 5.65 Δ Total Savings = 4.44 2 6 10 14 18

• 5

5 Employer Pensions Total Saving Event Study around Switches to Firm with >3% Increase in Employer Pension Rate Individuals with Positive Pension Contributions or Savings Prior to Switch

Fraction at Corner around Switches to Firm with >3% Increase in Employer Pension Rate Year Relative to Firm Switch Percent at Corner Δ Zero Pension Contrib.= 1.4% 20 40 60 80 100

• 5

5 Individual Pensions

Year Relative to Firm Switch Percent at Corner Δ Zero Pension Contrib.= 1.4% Predicted = 28.4% 20 40 60 80 100

• 5

5 Individual Pensions Predicted with Full Crowd-Out Fraction at Corner around Switches to Firm with >3% Increase in Employer Pension Rate

Changes in Individual Pension Contributions in Year of Firm Switch Percent of Individuals D Private Pension Contributions as a Percentage of Income 10 20 30 40

• 3
• 2
• 1

1 2 3

Change Required to Offset 3% Increase

Contribution or Savings Rate (% of income) Year Relative to Firm Switch Δ Employer Pensions = 5.65 Δ Total Savings = 4.44 2 6 10 14 18

• 5

5 Employer Pensions Total Saving Event Study around Switches to Firm with >3% Increase in Employer Pension Rate Individuals with Positive Pension Contributions or Savings Prior to Switch

Changes in Total Savings Rates vs. Changes in Employer Pension Rates for Firm Switchers Change in Total Savings Rate (% of income)

• 5

5 10 Total Savings Pass-Through Rate: b = 90% (0.9%) Change in Employer Pension Contributions (% of income)

• 5

5 10

Changes in Total Savings Rates vs. Changes in Wage Rates for Firm Switchers with Positive Savings Prior to Switch Percentage Change in Wage Rate

• 50

50 100

• 50

50 100 Change in Total Savings Rate (% of income) Marginal Propensity to Save: 10.2% (0.1%)

Pass-Through of Employer Pension to Total Savings by Years Since Firm Switch Pass-Through of Employer Pensions to Total Savings Years Since Firm Switch .2 .4 .6 .8 1 2 4 6 8 10

Total Wealth Accrued from Switch to Retirement (Age 60)

• vs. Changes in Employer Pension Rate at Switch

Total Saving From Switch to Age 60 (% of Earnings before Switch)

Change in Employer Pension Contributions (% of Income) Δ Retirement Balance / Δ Emp. Pension = 5.81 (0.38)

• 40
• 20

20 40 60

• 5

5

Sample: All Firm Switches All Firm Switches All Firm Switches Mass Layoff Large Changes First Switch Switch Ages 46-54

• Dep. Var.:

Δ Pension Rate Δ Savings Rate Δ Savings Rate Δ Savings Rate Δ Savings Rate Δ Savings Rate Δ Retirement Balance (1) (2) (3) (4) (5) (6) (7) Δ Emp. Pens. Contrib. Rate 0.947 (0.002) 0.900 (0.009) 0.888 (0.009) 0.865 (0.110) 0.897 (0.011) 0.832 (0.018) 5.806 (0.380) Δ Wages 0.043 (0.001)

• No. of

Obs.

910,866 2,078,612 2,078,612 36,659 216,613 716,273 55,608

Employer Pensions: Pass-Through Estimates

Employer pensions provide good identifying variation but may not be identical to impacts of government policies For instance: workers may be more willing to change consumption plans when switching firms In the paper, we also directly study a mandate imposed by Danish government in 1998 Required individuals above eligibility threshold of DKr 35,000 to contribute 1% of savings to mandatory savings account Estimate impacts using RD and DD designs Main finding: $1 contribution to mandatory savings plan  ~ $1 increase in pensions and total savings

Impacts of Mandates

Mandated Savings (M) Around Eligibility Threshold in 1998 Mandated Savings (DKr) 2000 4000 6000 Income (DKr 1000s) 14.5 24.5 34.5 44.5 54.5

Effect on Mandate on Total (Non-Employer) Savings: Threshold Approach Empirical Income (DKr 1000s) 34 36 38 40 42 44 14.5 24.5 34.5 44.5 54.5 Percent with Non-Employer Savings > 1962 DKr

Percent with Non-Employer Savings > 1962 DKr Empirical Predicted with 100% Pass-Through Income (DKr 1000s) 34 36 38 40 42 44 14.5 24.5 34.5 44.5 54.5 Private Savings Pass-Through Rate: b = 117% (27%) Effect on Mandate on Total (Non-Employer) Savings: Threshold Approach

Impacts of Government Policies on Saving for Active vs. Passive Savers

Autom

• mat

atic ic Contribu ntributio tion Price ice Subsidy sidy Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Raises Pension Contribs. M+P? Raises Total Saving M+P+_S? Active Savers No No Yes Uncertain Passive Savers Yes Uncertain No No Data Yes Yes ? ?

Part 2 Impacts of Subsidies for Retirement Saving

Denmark has two types of tax-deductible savings accounts: Capital pensions: paid as a lump sum Annuity pensions: paid as annuity Subsidy for capital pensions for individuals in top income tax bracket was reduced in 1999 Tax treatment of annuity pensions unchanged

Impact of Subsidies

Taxation of Capital Pensions

Pre-1999 Tax At Time of Contribution 0% 14% 4% if in top tax bracket et Tax on Capital Gains ~20% ~20% Tax on Payout 40% 40%

Taxation of Capital Pensions

Pre-1999 Post-1999 Tax At Time of Contribution 0% 14% 4% if in top tax bracket et Tax on Capital Gains ~20% ~20% Tax on Payout 40% 40%

Gross Income Prior to Pension Contribution (DKr 1000s) Note: $1  6 DKr

1998 1999

Treated group Control group DSubsidy = -14% Subsidy for Capital Pensions in 1999 Subsidy for Capital Pension Contribs. 175 200 225 250 275 300 325 20% 40% 60%

Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs. 1996 Capital Pension Contribution (DKr) Income Relative to Top Tax Cutoff (DKr) 5000 10000 15000

• 75000
• 50000
• 25000

25000 50000 75000

Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs. 1996 1997 Capital Pension Contribution (DKr) 5000 10000 15000

• 75000
• 50000
• 25000

25000 50000 75000 Income Relative to Top Tax Cutoff (DKr)

Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs. 1996 1997 1998 Capital Pension Contribution (DKr) 5000 10000 15000

• 75000
• 50000
• 25000

25000 50000 75000 Income Relative to Top Tax Cutoff (DKr)

Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs. 1996 1999 1997 1998 Capital Pension Contribution (DKr) 5000 10000 15000

• 75000
• 50000
• 25000

25000 50000 75000 Income Relative to Top Tax Cutoff (DKr)

Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs. 1996 1999 1997 2000 1998 Capital Pension Contribution (DKr) 5000 10000 15000

• 75000
• 50000
• 25000

25000 50000 75000 Income Relative to Top Tax Cutoff (DKr)

Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs. 1996 1999 1997 2000 1998 2001 Capital Pension Contribution (DKr) 5000 10000 15000

• 75000
• 50000
• 25000

25000 50000 75000 Income Relative to Top Tax Cutoff (DKr)

Impact of 1999 Capital Pension Subsidy Reduction on Distribution of Capital Pension Contributions for Prior Contributors 20 40 60

• 100
• 80
• 60
• 40
• 20

20 40 60 80 100 1997 to 1998 Percent of Individuals Percentage Change in Capital Pension Contributions (Pt – Pt-1)/ Pt-1

Impact of 1999 Capital Pension Subsidy Reduction on Distribution of Capital Pension Contributions for Prior Contributors 20 40 60

• 100
• 80
• 60
• 40
• 20

20 40 60 80 100 1997 to 1998 1998 to 1999 Percent of Individuals Percentage Change in Capital Pension Contributions (Pt – Pt-1)/ Pt-1

Effect of 1999 Reform on Fraction of Capital Pension Contributors by Year for Individuals Contributing Prior to Reform Percent Still Contributing to Capital Pension Years Since 1999 Reform 20 40 60 80 100 2 4 6 8 10

Impacts of Government Policies on Saving for Active vs. Passive Savers

Autom

• mat

atic ic Contribu ntributio tion Price ice Subsidy sidy Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Raises Pension Contribs. M+P? Raises Total Saving M+P+S? Active Savers (Neoclassical) No No Yes Uncertain Passive Savers Yes Uncertain No No Data Yes Yes Yes ?

Two crowd-out parameters of interest

• 1. Shifting across pension accounts

What happens to each $1 taken out of capital pensions?

 55% goes to annuity pension, 45% taken out of pension

Relevant parameter for impacts of a policy that targets one type of retirement account (e.g. firm match for 401k)

Crowd-out of Retirement Savings

Two crowd-out parameters of interest

• 1. Shifting across pension accounts

What happens to each $1 taken out of capital pensions?

 55% goes to annuity pension, 45% taken out of pension

Relevant parameter for impacts of a policy that targets one type of retirement account (e.g. firm match for 401k) 2. Shifting from pension accounts to taxable savings accounts What happens to each $1 taken out of pension savings? Relevant parameter for determining overall impact of retirement savings subsidies on total savings

Crowd-out of Retirement Savings

Use change in capital pension subsidy as an instrument for total pension contributions $1 reduction in capital pensions  45 cent reduction in total pensions Does this 45 cents go into consumption or saving in taxable accounts? To estimate crowdout, exploit sharp change in marginal incentives at top bracket in 1999 Does marginal propensity to save in taxable accounts rise when individuals cross into top bracket after 1999? Implement using regression-kink design

Shifting from Retirement to Taxable Savings

10000 15000 20000 25000 30000 35000 Total Pensions (DKr)

• 75000
• 50000
• 25000

25000 50000 75000 Total Pensions vs. Income: Before Reduction in Capital Pension Subsidy Income Relative to Top Tax Cutoff (DKr)

Change in slope = +0.017

Total Pensions Year Total Pensions RK Coefficient Change in Marginal Propensity to Save in Retirement and Non-Retirement Accounts at Top Tax Cutoff by Year .002 .008 .014 .02 1996 1997 1998 1999 2000 2001

Δ MPS in Pensions: β = -1.00% (0.11)

Total Pensions RK Coefficient Change in Marginal Propensity to Save in Retirement and Non-Retirement Accounts at Top Tax Cutoff by Year

Δ MPS in Tax. Saving: β = 0.39% (0.09)

Taxable Savings Thresh. RK Coefficient Total Pensions Taxable Savings Threshold

• .002
• .008
• .006

.002 .008 .014 .02 1996 1997 1998 1999 2000 2001

Δ MPS in Pensions: β = -1.00% (0.11)

Year

• .004

Consider impacts of a DKR 1000 increase in pre-tax income DKR R 10.0 .0 less contributed to retirement accounts when subsidy fell MTR of 60%  disposable income rises by 0.4 x 10.0 = DKR KR 4.0 DKR R 3.9 9 of this is deposited in taxable savings DKR R 0.1 1 is consumed  net saving falls by DKR 0.1

 98% of the change in pension contributions due to subsidies is financed

by offsetting changes in savings in taxable accounts Based on this estimate, we calculate that each DKr 1 of tax expenditure

• n subsidies raises personal saving by less than 1 cent

Crowd-Out Estimates

Impacts of Government Policies on Savings for Active vs. Passive Savers

Autom

• mat

atic ic Contribu ntributio tion Price ice Subsidy sidy Raises Pension Contribs. M+P? Raises Total Savings M+P+S? Raises Pension Contribs. M+P? Raises Total Savings M+P+S? Active Savers No No Yes Uncertain Passive Savers Yes Uncertain No No Data Yes Yes Yes No No

Do automatic contributions raise saving more when subsidies are larger? We estimate interaction effect using two sources of variation in subsidy Pre vs. post 1999 for those in top bracket Below vs. above tax bracket cutoffs Pass-through of employer contributions very similar in all cases  Change in subsidy of 14 cents per DKr (50% reduction) has no impact on efficacy of automatic contributions

Interaction Between Subsidy and Auto. Contributions

Part 3 Identifying Active vs. Passive Savers

Are differences between impacts of automatic contributions and subsidies driven by active vs. passive choice? Test the mechanism by analyzing heterogeneity of responses across individuals

Heterogeneity: Active vs. Passive Savers

Recall that roughly 15% of agents respond actively to all 3 policies Employer Pensions: 1 minus pass-through = 16.8% Mandated Savings Plan: 1 minus pass-through = 13.8% Subsidy Reduction: fraction who reoptimize pension = 17.4%

Passive

1

Active

SUBSIDY MSP ESP

.17 .14

response to M and t

Heterogeneity: Active vs. Passive Savers

Test active vs. passive choice mechanism by analyzing 3 predictions

1.

[State dependence] Individuals should respond more to subsidy when actively changing pensions for other reasons Test if new pension contributors allocate more money to annuity accounts than capital accounts than prior contributors

Heterogeneity: Active vs. Passive Savers

Impact of Subsidy Change: Old vs. New Contributors Year Old Contributors New Contributors % Contributing to Capital Pensions 20 40 60 80 100 1998 1999

Impact of Subsidy Change: Old vs. New Contributors Year Old Contributors New Contributors % Contributing to Capital Pensions 20 40 60 80 100 1998 1999

Test active vs. passive choice mechanism by analyzing 3 predictions

1.

[State dependence] Individuals should respond more to subsidy when actively changing pensions for other reasons

2.

[Types] Individuals who optimize actively should respond to subsidy and undo automatic contributions to a greater degree Proxy for active optimization: frequency of changes in pension contributions in other years

Heterogeneity: Active vs. Passive Savers

Percent Responding to Capital Pension Subsidy Change in 1999

by Frequency of Active Changes in Other Years

5 10 15 20 25 20 40 60 80 100 Percentage of Other Years with Change in Individual Pension Contributions % Exiting Capital Pension and Raising Annuity in 1999

b = 0.153 (0.005)

Pass-Through of Employer Pension Changes for Firm-Switchers by Frequency of Active Changes in Other Years Pass-Through of Emp. Pensions to Total Pensions 20 40 60 80 100 88 90 92 94 96 98 Percentage of Other Years with Change in Individual Pension Contributions

b = - 0.076 (0.005)

Test active vs. passive choice mechanism by analyzing 3 predictions

1.

[State dependence] Individuals should respond more to subsidy when actively changing pensions for other reasons

2.

[Types] Active savers should respond to subsidy and undo automatic contributions to a greater degree

3.

[Observable heterogeneity] Active savers likely to be those who are already saving and planning for retirement Carroll et al. (2009): individuals with high discount rates both don’t save for retirement and delay financial planning

Heterogeneity: Active vs. Passive Savers

Heterogeneity in Response to Capital Pension Subsidy by Wealth/Income Ratio Wealth/Income Ratio in 1998 10 15 20 25 .5 1 1.5

b = 7.1 (0.4)

% Exiting Capital Pension and Raising Annuity in 1999

Heterogeneity in Pass-Through of Employer Pensions by Wealth/Income Ratio Wealth/Income Ratio in Year Prior to Switch Pass-Through of Employer Pensions to Total Savings 40 60 80 100 120 .5 1 1.5 2

b = - 20.8 (4.10)

Heterogeneity in Responses to Subsidies and Employer Pensions by Age Age in Year of Subsidy Change (1999) or Firm Switch Subsidy Response 60 80 100 8 10 12 14 16 20s 30s 40s 50s % Pass-Through of Employer Pensions to Total Savings % Exiting Capital Pension and Raising Annuity in 1999

Heterogeneity in Responses to Subsidies and Employer Pensions by Age Age in Year of Subsidy Change (1999) or Firm Switch Subsidy Response Employer Pension Pass-Through 60 80 100 8 10 12 14 16 20s 30s 40s 50s % Pass-Through of Employer Pensions to Total Savings % Exiting Capital Pension and Raising Annuity in 1999

Heterogeneity in Responses to Subsidies by Educational Attainment Education 5 10 15 20 No College College % Exiting Capital Pension and Raising Annuity in 1999

Heterogeneity in Responses to Subsidies by Educational Attainment Education 5 10 15 20 No College College Economics Training % Exiting Capital Pension and Raising Annuity in 1999

• Dep. Var.:

Exits Capital Pension and Increases Annuity Contribution in 1999? (1) (2) (3) (4) (5) (6) W / Y Ratio 0.071 (0.004) 0.062 (0.004) 0.060 (0.004) 0.057 (0.004) 0.053 (0.004) Age 0.002 (0.0001) 0.002 (0.0001) 0.002 (0.0001) 0.002 (0.0001) 0.002 (0.0001) College 0.030 (0.004) 0.027 (0.003) 0.015 (0.004) Economics Education 0.072 (0.007) 0.055 (0.007) Controls X

• No. of Obs.

62,641 62,641 62,641 62,641 62,641 62,641

Mean of Dependent Variable: 11.6% Observable Heterogeneity in Response to 1999 Subsidy Reduction

Two important strands of research have developed independently Crowd-out of retirement savings in non-retirement accounts Impacts of active vs. passive policies within retirement accounts These two issues are closely related Degree of crowd-out depends fundamentally on whether savings change is made actively or passively

Implications for Retirement Savings Literature

• 1. MPC differs sharply by the form of compensation

Increases in automatic pension contributions raise savings much more than increases in disposable income Difference is persistent over time even for large shocks

• 2. Data point to a “Spenders/Savers” model with heterogeneous agents

85% of individuals are “spenders” with cash-on-hand rule-of-thumb for consumption

• 3. Interest elasticity of savings is low for two reasons:

Among “savers,” reductions in pension savings due to the cut in the subsidy almost entirely offset by increases in taxable savings 85% who are “spenders” not do respond to changes in the subsidy

Implications for Models of Consumption

Tax subsidies are ineffective at raising savings for three reasons:

1.

Spend money subsidizing the savings of the 85% who are passive savers, who do not respond at all

2.

Crowd-out rates high among the 15% of active savers

3.

Active savers are already saving at higher rates  subsidies do not target those who may be least prepared for retirement Automatic contributions resolve all three of these problems United States flow tax expenditure on tax-deferred savings accounts exceeds $125 billion [JCT 2012] Are these policies the best way to raise retirement savings?

Implications for Tax Policy

Your ATP rate pension [MSP] Value as of Jan 1. 2004 Return in 2004 Tax on return in 2004 Administrative costs in 2004 Contribution in 2003 Net return on your contribution Value as of Jan 1. 2005 6,722.59 750.49

• 93.56
• 37.92

3,349.00 66.89 10,757.49 Dkr. Dkr. Dkr. Dkr. Dkr. Dkr. Dkr.

Summary Statistics

Variable Full Sample Top Bracket Sample (1) (2) Gross Labor Income 199,565 256,618 Gross Taxable Income 217,474 282,607 Net Capital Income

• 14,549
• 20,541

Assets (not incl. home equity) 51,602 60,495 Assets >10% of labor income 47% 42% Assets/Gross Labor Inc. Ratio 0.37 0.22 Total Savings 23,904 32,752 Saving Rate 18.92% 15.32% Liabilities (not incl. home mortgage) 76,539 95,374 Change in Liabilities 5,681 5,529 Net Savings Rate 4.06% 9.68% Pension Flows Fraction with Indiv. Pension 27% 36%

• Indiv. Pension

3,143 4,081

• Indiv. Pension Contribution Rate

1.18% 1.25%

• Indiv. Capital Pension

1,859 2,643

• Indiv. Annuity Pension

1,284 1,438 Fraction with Employer Pension 59% 83% Employer Pension 15,542 21,717 Employer Pension Contribution Rate 5.67% 6.98% Fraction with Any Pension 66% 90%

Summary Statistics

Variable Full Sample Top Bracket Sample (1) (2) Demographics Age 38.70 41.36 Female 52% 44% Married 48% 58% Has Partner 62% 73% Homeowner 51% 68% College Degree 41% 59% Some Economics Training 4% 4% Number of Observations 45,428,846 17,712,370

Event Study of Fraction at 0 Corner around Switches to Firm with >3% Increase in Employer Pension Rate Year Relative to Firm Switch Percent at Corner Δ Zero Pension Contrib.= 1.4% Predicted = 28.4% Δ Corner in Savings = 1.0% Predicted = 28.4% 20 40 60 80 100

• 5

5 Individual Pensions Total Savings Predicted with Full Crowd-Out Predicted with Full Crowd-Out

Sample: All Firm Switches Renters All Firm Switches Single Individuals

• Dep. Var.:

Δ Net Savings Δ Savings Rate Δ Household Savings Δ Savings Rate (1) (2) (3) (4) Δ Emp. Pens.

• Contrib. Rate

0.899 (0.014) 0.954 (0.013) 0.868 (0.010) 0.911 (0.015)

• No. of Obs.

1,858,297 941,450 2,024,950 793,188

Employer Pensions: Pass-Through Estimates Robustness Checks

Balance Test 1: Income Distribution Around Eligibility Threshold 1000 2000 3000 4000 5000 6000 Number of Taxpayers in Income Bin 14.5 24.5 34.5 44.5 54.5 Income (DKr 1000s)

Balance Test 2: Fraction Attending College Around Threshold 3 6 9 12 15 Percent Attending College 14.5 24.5 34.5 44.5 54.5 RD Estimate: b = 0.25% (0.30%) Income (DKr 1000s)

Total Non-Employer Savings Around Eligibility Cutoff in 1998 Income (DKr 1000s) Change in Non-Employer Savings

• 7000
• 6000
• 5000
• 4000
• 3000

14.5 24.5 34.5 44.5 54.5

RD estimates only apply to a low-income group of individuals Now show that similar results are obtained throughout income distribution using a difference-in-differences design Note that MSP was terminated in 2004

Government Mandated Savings Plan

Mandatory Pension Contributions (M) by Income Group 1000 2000 3000 4000 Mandated Savings (DKr) Bottom Tercile Middle Tercile Top Tercile

1% MSP Terminated 1% MSP Introduced

Year 1995 2000 2005 2010

Total Non-Employer Pension Contributions by Income Group Individual (Non-Employer) Pension Contribs. (DKr) Year Bottom Tercile Middle Tercile Top Tercile 2000 4000 6000 8000 10000 1995 2000 2005 2010 Pass-Through Rate to Total Indiv. Pensions: β = 91.1% (3.0%)

Percent of Individuals Contributing More than 1.5% of Income to Pensions Percent of Individuals Bottom Tercile Middle Tercile Top Tercile 10 20 30 40

Pass-Through Rate to Total Indiv. Pensions: β = 101% (2.2%)

Year 1995 2000 2005 2010

Total Savings by Income Group 5000 10000 15000 20000 Total Savings (DKr) Bottom Tercile Middle Tercile Top Tercile Year 1995 2000 2005 2010

25 30 35 40 Percent of Individuals Bottom Tercile Middle Tercile Top Tercile Effect of Mandate on Fraction of Individuals with Total Non-Employer Savings > 4% Year 1995 2000 2005 2010

Threshold-Based Analysis of Effect of Employer Provided Pension

• n Total Savings Rates

Actual Change in Savings Rate Predicted Change in Savings Rate Total Savings Pass-Through Rate: b = 96% (0.4%)

• .2

.2 .4

• .2

.2 .4

• Dep. Var.:

Δ Total Pensions % with Total Pensions > Mean Δ Total Ind. Savings % with Total

• Ind. Savings >

Mean Δ Total Savings % with Total Savings > Mean (1) (2) (3) (4) (5) (6) Pass-Through Estimate 0.946 (0.251) 0.862 (0.172)

• 2.248

(14.692) 1.172 (0.271) 2.771 (1.744) 1.149 (0.290) Research Design RD RD RD RD RD RD

• No. of Obs

37,616 183,001 92,872 156,157 92,186 156,157 Mandated Savings Plan: Pass-Through Estimates

Impacts of Government Policies on Savings for Active vs. Passive Savers

Autom

• mat

atic ic Contribu ntributio tion Price ice Subsidy sidy Raises Pension Contribs. M+P? Raises Total Savings M+P+S? Raises Pension Contribs. M+P? Raises Total Savings M+P+S? Active Savers No No Yes Uncertain Passive Savers Yes Uncertain No No Data Yes Yes ? ?

Impact of Subsidy Reduction On Individual Capital Pension Contribs. Capital Pension Contribution (DKr) 25-75K Below Top Tax Cutoff 25-75K Above Top Tax Cutoff

Subsidy for Capital Pension Reduced

DD Impact Estimate: β = - 2439.2 (97.65)

Year

2000 3000 4000 5000 6000 1995 1996 1997 1998 1999 2000 2001 2002

Impact of Capital Pension Subsidy Reduction On Annuity Pension Contributions 25-75K Below Top Tax Cutoff 25-75K Above Top Tax Cutoff Annuity Pension Contribution (DKr) 1000 2000 3000 4000

Subsidy for Capital Pension Reduced

Annuity Pension Offset: β = 56% (4.7%)

Year

1995 1996 1997 1998 1999 2000 2001 2002

Impact of Capital Pension Subsidy Reduction On Total Pension Contributions 25-75K Below Top Tax Cutoff 25-75K Above Top Tax Cutoff Total Pension Contribution (DKr)

Year

Subsidy for Capital Pension Reduced

3000 4000 5000 6000 7000 1995 1996 1997 1998 1999 2000 2001 2002

Impact of Capital Pension Subsidy Reduction On Total Pension Contributions 25-75K Below Top Tax Cutoff 25-75K Above Top Tax Cutoff Total Pension Contribution (DKr) Total Pensions Pass-Through Rate: β = 44% (4.7%)

Year

Subsidy for Capital Pension Reduced Change in Capital Pensions

3000 4000 5000 6000 7000 1995 1996 1997 1998 1999 2000 2001 2002

Impact of Capital Pension Subsidy Reduction On Taxable Savings 25-75K Below Top Tax Cutoff 25-75K Above Top Tax Cutoff Taxable Savings (DKr) Year

Subsidy for Capital Pension Reduced Change in Total Pensions

2000 4000 6000 8000 10000 1995 1996 1997 1998 1999 2000 2001 2002

Change in Total Pension Contributions Post-Reform (1999-2001) minus Pre-Reform (1996-1998) Change in Total Pensions (DKr) Income Relative to Top Tax Cutoff (DKr)

• 2000
• 1500
• 1000
• 500
• 75000
• 50000
• 25000

25000 50000 75000 Change in Slope at Cutoff = - 9.9 / 1000 (1.2) Total Pensions Pass-Through Rate Δ Tot. Pens. / Δ Cap. Pens.: β = 0.48 (0.05)

Change in Taxable Savings Post-Reform (1999-2001) minus Pre-Reform (1996-1998) Change in Taxable Savings (DKr) Income Relative to Top Tax Cutoff (DKr)

• 800
• 400

400

• 75000
• 50000
• 25000

25000 50000 75000 Crowd-Out of Pension Contribution ΔTaxable Saving / Δ Pension Contrib.: β = -1.47 (0.67) Change in Slope at Cutoff = 5.9 / 1000 (2.8)

Change in Fraction with Above-Median Savings Post-Reform (1999-2001) minus Pre-Reform (1996-1998) Income Relative to Top Tax Cutoff (DKr) Change in % with Taxable Savings Above Median

• 1.25
• .75
• .25

.25 .75 1.25

• 75000
• 50000
• 25000

25000 50000 75000 Crowd-Out of Pension Contribution ΔTaxable Saving / Δ Pension Contrib.: β = -0.98 (0.22)

• Ch. in Slope at Cutoff = 0.019% / 1000

(0.004%)

Difference-in-Differences Regression Kink Annuity Contrib. Total Pensions Contrib. Taxable Savings Taxable Savings Taxable Savings Threshold (1) (2) (3) (4) (5) Capital Pension Contrib.

• 0.562

(0.047) 0.438 (0.047) Total Pension Contrib. 0.867 (2.453)

• 1.471

(0.665)

• 0.980

(0.222)

• No. of Obs.

4,697,656 4,697,656 4,697,656 7,011,068 7,011,068

Pension Subsidy Pass-Through Estimates