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Research Article
» Response to EBRI Critique |
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The United
States spends more than $100 billion per year on tax subsidies
for retirement savings accounts such as 401(k)s and IRAs. Do
these subsidies encourage families to save more, or do they
induce them to shift money they would have saved anyway into
tax-advantaged retirement accounts with no net increase in
savings? While many studies have investigated this question,
the answers remain uncertain because of inadequate data in the
U.S. We turn to data from Denmark, where we obtain 41 million
observations on savings, for new evidence.
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When individuals in the top
income tax bracket received a smaller tax subsidy for
retirement savings, they started saving less in retirement
accounts... |
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... but the same
individuals increased the amount they were saving outside
retirement accounts by almost exactly the same amount, leaving
total savings essentially unchanged. We estimate that each $1
of government expenditure on the subsidy raised total savings
by 1 cent. |
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If subsidies have little
impact on retirement saving, are other policies more
effective? We find that "nudges" such as automatic
contributions by employers have much larger effects on
savings. When individuals switch to firms with higher
automatic employer pension contributions, their savings rates
increase significantly. Most individuals are passive savers
who do not pay attention to employer pension contributions and
thus do not offset such contributions by saving less in other
accounts. |
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These findings call into question whether tax
subsidies are the most effective policy to increase retirement
savings. Automatic enrollment or default policies that nudge
individuals to save more could have larger impacts at lower
fiscal cost.
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