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
Introduction Research Question: Do retirement savings policies raise total savings or simply induce individuals to shift savings across accounts? Automatic Contribution Saving Policies 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 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. Automatic contributions affect the pension contributions of passive savers, whereas price subsidies affect the pension contributions of active savers.
Price Subsidy Background 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 individuals 1) 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.