This paper investigates the effects of retirement savings options on wealth accumulations. Whether it is active – individuals taking action to raise saving – or passive – retirement saving rises if no action – decisions, the magnitude of these effects vary substantially. Finding that approximately 15% of individuals choose the active policy primarily after government (tax) subsidies, and 85% prefer the status quo at first but rely on the automatic contributions, Chetty et al. shed some light on the empirical impacts of price subsidies and automatic contributions while drawing comparisons on their effectiveness and suggest that “automatic contributions are more effective at increasing savings rates than subsidies”. Three reasons evoked: few responses to subsidies (less active than passive individuals), crowding out by accounts shifting, and default effect to subsidies for passive individuals.
Engaging the hot question regarding the effects of retirement savings policies on wealth accumulation by using high quality data – 41 million observations – is the tour de force of this paper. The core contributions are as follow: analysis of the impacts of automatic contribution (employer pension option and government mandates), measurement of the effects of subsidies for retirement savings, the crowd-out effects induced by the shifting between different accounts (different pension accounts and pension accounts to taxable savings accounts) and finally a closer look to “the heterogeneity in responses across individuals” (passive vs active individuals).
The clarity of the exposé, the quality of the data and the conclusions drawn regarding the increase of total savings 1) by government subsidies (1%), 2) by automatic contributions (substantial) are remarkable but it has been unclear whether individuals offset those increases by saving less elsewhere.
A must read.
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