Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts
Raj Chetty, John N. Friedman, Søren Leth-Petersen, Torben Heien Nielsen, Tore Olsen
The Quarterly Journal of Economics / NBER · 2014
Abstract
Uses population-scale Danish data to ask whether tax subsidies or automatic contributions do more to raise retirement saving, distinguishing 'active savers' who respond to incentives from 'passive savers' who follow the path of least resistance.
Methodology
Analysis of administrative records covering millions of individuals, exploiting policy variation and job changes that shift automatic employer pension contributions, to decompose responses into active and passive.
Findings
About 85% of individuals are passive savers who do not respond to tax subsidies; each krone of subsidy generates very little new saving because it mostly shifts assets across accounts, whereas automatic contributions raise total wealth roughly one-for-one. Defaults reach the many; price incentives reach only the attentive few.
Applied nudge
For the large passive majority, automatic contributions build wealth that tax incentives never will—set the beneficial flow as the default rather than rewarding the minority who already optimize.
Citation
Chetty, R., Friedman, J. N., Leth-Petersen, S., Nielsen, T. H., & Olsen, T. (2014). Active vs. passive decisions and crowd-out in retirement savings accounts. Quarterly Journal of Economics, 129(3), 1141-1219.
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