Active vs. Passive Decisions and Crowdout in Retirement Savings Accounts: Evidence from Denmark

85 Pages Posted: 9 Jan 2013 Last revised: 24 Sep 2022

See all articles by Raj Chetty

Raj Chetty

Harvard University

John N. Friedman

National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Søren Leth‐Petersen

University of Copenhagen - Department of Economics; Centre for Economic Policy Research (CEPR)

Torben Nielsen

The Danish National Centre for Social Research

Tore Olsen

Harvard University

Date Written: November 2012

Abstract

Using 41 million observations on savings for the population of Denmark, we show that the impacts of retirement savings policies on wealth accumulation depend on whether they change savings rates by active or passive choice. Subsidies for retirement accounts, which rely upon individuals to take an action to raise savings, primarily induce individuals to shift assets from taxable accounts to retirement accounts. We estimate that each $1 of government expenditure on subsidies increases total saving by only 1 cent. In contrast, policies that raise retirement contributions if individuals take no action - such as automatic employer contributions to retirement accounts - increase wealth accumulation substantially. We estimate that approximately 15% of individuals are "active savers" who respond to tax subsidies primarily by shifting assets across accounts. 85% of individuals are "passive savers" who are unresponsive to subsidies but are instead heavily influenced by automatic contributions made on their behalf. Active savers tend to be wealthier and more financially sophisticated. We conclude that automatic contributions are more effective at increasing savings rates than subsidies for three reasons: (1) subsidies induce relatively few individuals to respond, (2) they generate substantial crowd-out conditional on response, and (3) they do not increase the savings of passive individuals, who are least prepared for retirement.

Suggested Citation

Chetty, Raj and Friedman, John Norton and Friedman, John Norton and Leth-Petersen, Soren and Nielsen, Torben and Olsen, Tore, Active vs. Passive Decisions and Crowdout in Retirement Savings Accounts: Evidence from Denmark (November 2012). NBER Working Paper No. w18565, Available at SSRN: https://ssrn.com/abstract=2198262

Raj Chetty (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

John Norton Friedman

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Soren Leth-Petersen

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Torben Nielsen

The Danish National Centre for Social Research ( email )

Herluf Trolles Gade 11
Copenhagen, 1052
Denmark

Tore Olsen

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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