Active vs Passive Decisions and Crowd-Out in Retirement Savings

Accounts: Evidence from Denmark

Chetty, Friedman, Leth-Petersen, Nielsen and Olsen (2014)

By: Tony Amornrat and Gong Yi

Outline:

1) Introduction

2) Price Subsidy

3) Heterogeneity in Behavioural Responses

IntroductionResearch Question:• Do retirement savings policies raise total savings or simply induce

individuals to shift savings across accounts?

Saving Policies

Automatic Contribution

Price Subsidy

Data:• Denmark: Merged data from income tax register, population register and

data from labour market research • Danish population from 1995 to 2009 • 4 million individuals (excluded individuals below 18 or over 60 and the self

employed)

Active vs. Passive

Automatic contributions affect the pension contributions of passive savers, whereas price subsidies affect the pension contributions of active savers.

Active savers : make savings decisions by maximizing utility, taking into account the subsidies and automatic contributions.

Passive savers : make fixed pension contributions that are invariant to the automatic contribution and subsidy.

Price SubsidyBackground

• 2 types of pension: Capital Pension and Annuity Pension

• Policy Change: In 1999, reduction in subsidy for capital pension for

individuals in the top tax cutoff.

• Cutoff: DKr 251,200 (US $38,600)

Analysis

• Effect of reduction of subsidy on contributions to capital pension

• The degree of active response

• Analysing Crowd-Out

Effect of Subsidies on Capital Pension Contributions

Effect of Subsidies on Capital Pension Contributions

Capital Pension Contribution

Indicator for the years including and after 1999

Indicator for having taxable income above top tax cutoff- Treatment Group

Coefficient of Interest: Effect of subsidy reduction on the level of capital pension contributions

Effect of Subsidies on Capital Pension Contributions

Effect of Subsidies on Capital Pension Contributions

The Degree of Active Response

• Reduction in individual capital contribution ignores the

substantial heterogeneity in response across individuals

• In our interests to find out the source for the observed

reduction in capital contribution

The Degree of Active Response

The Degree of Active Response

19%

Crowd-Out

• What happens to the money following the reduction in

capital pension contributions?

• Shift between different types of retirement

accounts

• Shift from retirement accounts to taxable accounts

Crowd-Out- Within Retirement Accounts

Crowd-Out- Within Retirement Accounts

• Individuals shift 57 cents of each

dollar they would have contributed to

capital pension account to annuity

pension instead due to the subsidy

change.

Crowd-Out- Taxable Savings

Crowd-Out- Taxable Savings

Full crowd-out from the

subsidy change. 98 cents

of each DKr 1 withdrawn

from retirement savings

accounts is shifted to

taxable savings account.

Heterogeneity of responses across individuals1) Are individuals currently making active choices more responsive to price

subsidies? 2) How does individual responsiveness relate to the frequency of changes in

pension contributions in other years ? 3) What observable characteristics can identify active savers ?

Results

1) The 1999 subsidy reduction has much larger effects on individuals starting a new pension in that year relative to those making pension contributions in previous years.

2) Individuals who actively change their pension contributions more frequently in other years are more responsive to the price subsidy change and more likely to offset automatic contributions by changing their own individual pension contributions.

3) Individuals who are wealthier, older, or have economics training are more responsive to price subsidies and more likely to offset automatic contributions.

Conclusion

1. Price subsidies are not effective in increasing saving rates.

• Majority of the savers are passive savers that do not respond to the

policy change.

• Even within active savers, they respond by shifting savings across

accounts rather than increasing total savings

2. Take into account the characteristics of individuals when introducing

policies.

3. Support the arguments for using default options in crafting policies.