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 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. Tax subsidies [by which they mean tax breaks, not actual subsidies--DRH], 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 savings automatically even if individuals take no action--such as employer-provided pensions or automatic 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 savings of passive individuals who do not reoptimize. We estimate that 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 also offset changes in automatic contributions and have higher wealth-income ratios. We conclude that automatic contributions are more effective at increasing total retirement savings than price
subsidies for three reasons: (1) subsidies induce relatively few individuals to respond, (2) they generate substantial crowdout conditional on response, and (3) they do not influence the savings behavior of passive individuals, who are least prepared for retirement.
This is the abstract of "Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark," by Raj Chetty, John N. Friedman, Soren Leth-Petersen, Torben Heien Nielsen, and Tore Olsen. This is the non-gated version. Here is the NBER gated version.
Admittedly, I read the study quickly but I found their case persuasive although it conflicts with my priors. Thus the title of this post. Had you told me that 40% of people are passive savers in the sense that the authors mean, I would have had no trouble believing you. But 85 percent? Wow!