Active vs. Passive Decisions and Crowd-out in Retirement ......Jan 13, 2013 · DKR 0.08 is consumed net saving falls by DKR 0.08 98% of the increase in pension contributions due

Active vs. Passive Decisions and Crowd-out in Retirement Savings

Accounts: Evidence from Denmark

Raj Chetty, Harvard and NBER

John N. Friedman, Harvard and NBER

Soren Leth Petersen, Univ. of Copenhagen and SFI

Torben Nielsen, Univ. of Copenhagen and SFI

Tore Olsen, Univ. of Copenhagen and CAM

February 2013

Policy Question

U.S. spends approximately $100 billion per year on subsidies for

retirement savings accounts such as 401(k)’s and IRA’s [JCT 2012]

Goal of these subsidies is to increase savings rates

We evaluate whether subsidies accomplish this goal

Do tax subsidies encourage families to save more…

or simply induce shifting into tax-advantaged accounts?

Prior Work

Extensive research on this question over three decades using U.S. data [e.g. Hubbard 1984, Skinner and Feenberg 1990, Poterba, Venti, Wise 1996,

Engen, Gale, Scholz 1996, Engelhardt and Kumar 2007, Gelber 2010]

But answer remains highly debated

Main problem: lack of high quality data on household savings in non-retirement accounts in the U.S. [Bernheim 2002]

U.S. studies have good information on retirement account balances

and agree on impacts of policy within these accounts

But identifying policy impacts on saving in non-retirement accounts

has proven much more challenging

To obtain more precise evidence, we turn to data from Denmark

Universe of Danish income tax returns, 1994-2009

4.3 million individuals (aged 18-60)

45 million observations on savings

Data on total financial savings from 3rd party reports to tax authority

High quality savings measures that with little reporting and

measurement error

Danish Savings Data

Should U.S. Policy be Informed by Danish Data?

1. Pension system in Denmark is similar in structure to the U.S.

State-provided defined benefit plan (analogous to Social Security)

Employer-provided defined contribution accounts (401(k)'s)

Individual retirement accounts (IRA's)

2. Savings rates for working-age individuals are comparable

3. Policy impacts within retirement accounts in Denmark match the U.S.

Ex: impacts of subsidies and defaults on retirement contributions

Savings decisions outside retirement accounts likely to be similar as well

Overview

We analyze two types of policies using quasi-experimental methods

1. Automatic contributions by government or employers to workers’

retirement savings accounts

2. Tax subsidies for retirement savings

Main finding: Automatic contributions raise total savings much more than

price subsidies

Interpret this result through a model of active vs. passive savers

Impacts of Government Policies on Saving

for Active vs. Passive Savers

Automatic Contribution Tax Subsidy

Raises Pension

Contribs.?

Raises Total

Saving?

Raises Pension

Contribs.?

Raises Total

Saving?

Active Savers No No Yes Uncertain

Passive Savers Yes Uncertain No No

Data ? ? ? ?




Raises Pension

Contribs.?

Raises Total

Saving?

Raises Pension

Contribs.?

Raises Total

Saving?



Data ? ? ? ?




Raises Pension

Contribs.?

Raises Total

Saving?

Raises Pension

Contribs.?

Raises Total

Saving?



Data ? ? ? ?

Outline

1. Impacts of Tax Subsidies

2. Impacts of Automatic Contributions

3. Testing for Active vs. Passive Choice

4. Policy Lessons

Part 1

Impacts of Subsidies for Retirement Saving

Denmark has two types of tax-deductible savings accounts:

Capital pensions: paid as a lump sum

Annuity pensions: paid as annuity

Subsidy for capital pensions for individuals in top income tax bracket

was reduced in 1999

Tax treatment of annuity pensions unchanged

Impact of Subsidies: Quasi-Experimental Design

Taxation of Capital Pensions

Pre-1999

Tax At Time of Contribution 0% 14% if in top tax

bracket

Tax on Capital Gains ~20% ~20%

Tax on Payout 40% 40%


Pre-1999 Post-1999


bracket

Tax on Capital Gains ~20% ~20%


Gross Income Prior to Pension Contribution (DKr 1000s)

Note: $1 6 DKr

1998

1999

Treated group Control group

DSubsidy = -14%

Change in Subsidy for Capital Pensions in 1999 S

ubsid

y f

or

Capital P

ensio

n C

ontr

ibs.

175 200 225 250 275 300 325

0

20%

40%

60%

Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs.

1996

Capital P

ensio

n C

ontr

ibution (

DK

r)

Income Relative to Top Tax Cutoff (DKr)

0

5000

10000

15000

-75000 -50000 -25000 0 25000 50000 75000


1996 1997

Capital P

ensio

n C

ontr

ibution (

DK

r)

0

5000

10000

15000

-75000 -50000 -25000 0 25000 50000 75000



1996 1997 1998

Capital P

ensio

n C

ontr

ibution (

DK

r)

0

5000

10000

15000

-75000 -50000 -25000 0 25000 50000 75000



1996

1999

1997 1998

Capital P

ensio

n C

ontr

ibution (

DK

r)

0

5000

10000

15000

-75000 -50000 -25000 0 25000 50000 75000



1996

1999

1997

2000

1998

Capital P

ensio

n C

ontr

ibution (

DK

r)

0

5000

10000

15000

-75000 -50000 -25000 0 25000 50000 75000



1996

1999

1997

2000

1998

2001

Capital P

ensio

n C

ontr

ibution (

DK

r)

0

5000

10000

15000

-75000 -50000 -25000 0 25000 50000 75000


Impact of 1999 Capital Pension Subsidy Reduction on Distribution of

Capital Pension Contributions 0

20

40

60

-100 -80 -60 -40 -20 0 20 40 60 80 100

1997 to 1998

Perc

ent

of In

div

iduals

Percentage Change in Capital Pension Contributions (Pt – Pt-1)/ Pt-1


Capital Pension Contributions 0

20

40

60

-100 -80 -60 -40 -20 0 20 40 60 80 100

1997 to 1998 1998 to 1999

Perc

ent

of In

div

iduals


10000

15000

20000

25000

30000

35000

Tota

l P

ensio

ns (

DK

r)

-75000 -50000 -25000 0 25000 50000 75000

Before Reduction in Subsidy

Total Pensions vs. Income:

Before and After Reduction in Capital Pension Subsidy


Change in slope = +0.017

10000

15000

20000

25000

30000

35000

Tota

l P

ensio

ns (

DK

r)

-75000 -50000 -25000 0 25000 50000 75000




Before Reduction in Subsidy After Reduction in Subsidy



Total Pensions

Year

Tota

l P

ensio

ns R

K C

oeffic

ient

.005

.01

.015

.02

1996 1997 1998 1999 2000 2001

Change in Marginal Propensity to Save in Retirement

and Non-Retirement Accounts at Top Tax Cutoff by Year

Total Pensions Taxable Savings

Year

Taxable

Savin

gs R

K C

oeffic

ient

Tota

l P

ensio

ns R

K C

oeffic

ient

-.008

.004

.005

.01

.015

.02

1996 1997 1998 1999 2000 2001



-.004

0.0

0

Consider impacts of a DKR 1000 increase in pre-tax income

DKR 10.0 less contributed to retirement accounts when subsidy fell

MTR of 60% disposable income rises by 0.4 x 10.0 = DKR 4.0

DKR 3.92 of this is deposited in taxable savings

DKR 0.08 is consumed net saving falls by DKR 0.08

98% of the increase in pension contributions due to subsidies is financed

by offsetting reductions in savings in taxable accounts

Based on this estimate, we calculate that each DKr 1 of tax expenditure

on subsidies raises total saving by less than 1 cent

Crowd-Out Estimates



Tax Subsidy Automatic Contribution

Raises Pension

Contribs.?

Raises Total

Saving?

Raises Pension

Contribs.?

Raises Total

Saving?

Active Savers Yes Uncertain No No

Passive Savers No No Yes Uncertain

Data Yes No ? ?

Part 2

Impacts of Automatic Contributions

Two quasi-experimental research designs:

1. Variation in employer-provided pensions

2. Government mandatory savings plan

Present results from the first research design here

Study impacts of sharp changes in employer pension contributions when

individuals switch jobs

Focus on individuals who made individual pension contributions prior

to switch, who can offset changes in employer contributions

Impact of Automatic Contributions

Contr

ibution o

r S

avin

gs R

ate

(%

of in

com

e)

Year Relative to Firm Switch

Δ Employer Pensions = 5.65

2

6

10

14

18

-5 0 5

Impact of Switching to Firm with >3% Increase in Employer Pension Rate

Employer Pensions Total Pensions

Contr

ibution o

r S

avin

gs R

ate

(%

of in

com

e)



Δ Total Pensions = 4.86

2

6

10

14

18

-5 0 5



Contr

ibution o

r S

avin

gs R

ate

(%

of in

com

e)



Δ Total Savings = 4.44

2

6

10

14

18

-5 0 5

Employer Pensions Total Savings


Fraction at Corner around Switches to Firm with

>3% Increase in Employer Pension Rate


Perc

ent

at C

orn

er

Δ Zero Pension Contrib.= 1.4%

20

40

60

80

100

-5 0 5

Individual Pensions


Perc

ent

at C

orn

er


Predicted = 28.4%

20

40

60

80

100

-5 0 5

Individual Pensions Predicted with Full Crowd-Out



Event Study of Fraction at 0 Corner around Switches to Firm with



Perc

ent

at C

orn

er


Predicted = 28.4%

Δ Corner in Savings = 1.0%

Predicted = 28.4%

20

40

60

80

100

-5 0 5

Individual Pensions

Total Savings

Predicted with Full Crowd-Out


Changes in Individual Pension Contributions in Year of Firm Switch P

erc

ent

of In

div

iduals

D Private Pension Contributions as a Percentage of Income

0

10

20

30

40

-3 -2 -1 0 1 2 3

Change Required to

Offset 3% Increase

Contr

ibution o

r S

avin

gs R

ate

(%

of in

com

e)




2

6

10

14

18

-5 0 5



Changes in Total Savings Rates vs. Changes in Employer Pension Rates

for Firm Switchers C

hange in T

ota

l S

avin

gs R

ate

(%

of in

com

e)

-5

0

5

10

Total Savings

Pass-Through Rate: b = 90%

(0.9%)

Change in Employer Pension Contributions (% of income)

-5 0 5 10

Percentage Change in Earnings

-50

0

50

100

-50 0 50 100

Change in T

ota

l S

avin

gs R

ate

(%

of in

com

e)

Marginal Propensity to Save: 10.2%

out of Disposable Income (0.1%)

Changes in Total Savings Rates vs. Changes in Earnings

for Firm Switchers

Changes in Total Wealth at Retirement vs.

Changes in Employer Pension Rate at Switch Tota

l S

avin

g F

rom

Sw

itch to A

ge 6

0 (

% o

f E

arn

ings b

efo

re S

witch)

Change in Employer Pension Contributions (% of Income)

Δ Retirement Balance / Δ Emp. Pension = 5.81

(0.38)

-40

-20

0

20

40

60

-5 0 5



Tax Subsidy Automatic Contribution

Raises Pension

Contribs.?

Raises Total

Saving?

Raises Pension

Contribs.?

Raises Total

Saving?

Active Savers Yes Uncertain No No

Passive Savers No No Yes Uncertain

Data Yes No Yes Yes

Part 4

Testing for Active vs. Passive Choice

Why do automatic contribs. and subsidies have very different impacts?

Important to understand mechanism to determine if results will

apply in the U.S.

Our hypothesis: auto contributions affect passive savers, while subsidy

affects only active savers

Test this mechanism by analyzing variation in response across individuals

Note that roughly 15% of individuals respond actively to both policies

17% of individuals changed contributions when subsidy was reduced

Less than 15% of individuals offset employer pension changes

Active vs. Passive Savers

Percent Responding to Capital Pension Subsidy Change in 1999

by Frequency of Active Changes in Other Years 0

5

10

15

20

25

0 20 40 60 80 100

Percentage of Other Years with Change in Individual Pension Contributions

% E

xitin

g C

apital P

ensio

n a

nd R

ais

ing A

nnuity in 1

999

b = 0.153

(0.005)

Pass-Through of Employer Pension Changes for Firm-Switchers

by Frequency of Active Changes in Other Years

Pass-T

hro

ugh o

f E

mp. P

ensio

ns t

o T

ota

l P

ensio

ns

0 20 40 60 80 100

88

90

92

94

96

98


b = - 0.076

(0.005)

Heterogeneity in Response to Capital Pension Subsidy by Wealth/Income Ratio

Wealth/Income Ratio in 1998

10

15

20

25

0 .5 1 1.5

b = 7.1

(0.4)

% E

xitin

g C

apital P

ensio

n a

nd R

ais

ing A

nnuity in 1

999

Heterogeneity in Pass-Through of Employer Pensions by Wealth/Income Ratio

Wealth/Income Ratio in Year Prior to Switch

Pa

ss-T

hro

ugh o

f E

mplo

yer

Pensio

ns t

o T

ota

l S

avin

gs

40

60

80

100

120

0 .5 1 1.5 2

b = - 20.8

(4.10)

Heterogeneity in Responses to Subsidies and Employer Pensions by Age

Age in Year of Subsidy Change (1999) or Firm Switch

Subsidy Response

60

80

100

8

10

12

14

16

20s 30s 40s 50s

Pass-T

hro

ugh o

f E

mplo

yer

Pensio

ns t

o T

ota

l S

avin

gs

% E

xitin

g C

apital P

ensio

n a

nd R

ais

ing A

nnuity in 1

999



Subsidy Response Employer Pension Pass-Through

60

80

100

8

10

12

14

16

20s 30s 40s 50s

Pass-T

hro

ugh o

f E

mplo

yer

Pensio

ns t

o T

ota

l S

avin

gs

% E

xitin

g C

apital P

ensio

n a

nd R

ais

ing A

nnuity in 1

999

Heterogeneity in Responses to Subsidies by Educational Attainment

Education

0

5

10

15

20

No College College Economics Training

% E

xitin

g C

apital P

ensio

n a

nd R

ais

ing A

nnuity in 1

999

Policy Implications

Tax subsidies are ineffective at raising savings for three reasons:

1. Spend money subsidizing the savings of the 85% who are passive

savers, who do not respond at all

2. Crowd-out rates very high among the 15% of active savers

3. Active savers are already saving at higher rates subsidies do not

target those who may be least prepared for retirement

Automatic contributions directly resolve these problems

Increase savings substantially because they do not require active

choice by savers

Targets individuals who have lower savings rates

Policy Lessons in Denmark

1. Are American and Danish households similar?

2. Are American and Danish retirement savings institutions similar?

Translating the Lessons to the U.S.


Degree of passive behavior within retirement accounts in the U.S. is

similar to our estimates in Danish data [e.g., Madrian and Shea 2001]

Implies that automatic contributions would be more effective than

subsidies in raising total savings in the U.S. as well



2. Are American and Danish retirement savings institutions similar?

Yes, with one exception: access to retirement savings accounts is

mostly dependent on employers in the U.S. (e.g. 401(k)s)

Reducing subsidy could affect access to 401(k)s for workers

A small tax credit for firms should be adequate to ensure that firms

continue to offer access to pension accounts

More broadly, no reason to tie retirement savings to firms

Government could raise IRA limits and allow payroll deduction


Findings call into question whether existing subsidies are the most

cost-effective way to raise savings rates

Alternative policies that expand existing institutions could raise savings

rates significantly while reducing government expenditure:

1. Expand defaults and automatic enrollment

2. Allow automatic payroll-deductible contributions to IRA’s

3. Small tax credit or deduction to incentive employers and

encourage auto enrollment

Policy Implications for the U.S.

Active vs. Passive Decisions and Crowd-out in Retirement Savings

Accounts: Evidence from Denmark

Raj Chetty, Harvard and NBER

John N. Friedman, Harvard and NBER

Soren Leth Petersen, Univ. of Copenhagen and SFI

Torben Nielsen, Univ. of Copenhagen and SFI

Tore Olsen, Univ. of Copenhagen and CAM

February 2013

Summary Statistics Variable Full Sample Top Bracket Sample

(1) (2)

Gross Labor Income 199,565 256,618

Gross Taxable Income 217,474 282,607

Net Capital Income -14,549 -20,541

Assets (not incl. home equity) 51,602 60,495

Assets >10% of labor income 47% 42%

Assets/Gross Labor Inc. Ratio 0.37 0.22

Total Savings 23,904 32,752

Saving Rate 18.92% 15.32%

Liabilities (not incl. home mortgage) 76,539 95,374

Change in Liabilities 5,681 5,529

Net Savings Rate 4.06% 9.68%

Pension Flows

Fraction with Indiv. Pension 27% 36%

Indiv. Pension 3,143 4,081

Indiv. Pension Contribution Rate 1.18% 1.25%

Indiv. Capital Pension 1,859 2,643

Indiv. Annuity Pension 1,284 1,438

Fraction with Employer Pension 59% 83%

Employer Pension 15,542 21,717

Employer Pension Contribution Rate 5.67% 6.98%

Fraction with Any Pension 66% 90%

Summary Statistics Variable Full Sample Top Bracket Sample

(1) (2)

Demographics

Age 38.70 41.36

Female 52% 44%

Married 48% 58%

Has Partner 62% 73%

Homeowner 51% 68%

College Degree 41% 59%

Some Economics Training 4% 4%

Number of Observations 45,428,846 17,712,370

Contr

ibution o

r S

avin

gs R

ate

(%

of in

com

e)



2

6

10

14

18

-5 0 5

Event Study around Switches to Firm with >3% Increase in Employer Pension Rate

for Individuals with Positive Pension Contributions or Savings Prior to Switch


Contr

ibution o

r S

avin

gs R

ate

(%

of in

com

e)



Δ Total Pensions = 4.86

2

6

10

14

18

-5 0 5




Contr

ibution o

r S

avin

gs R

ate

(%

of in

com

e)




2

6

10

14

18

-5 0 5







Perc

ent

at C

orn

er


20

40

60

80

100

-5 0 5

Individual Pensions


Perc

ent

at C

orn

er


Predicted = 28.4%

20

40

60

80

100

-5 0 5

Individual Pensions Predicted with Full Crowd-Out



Event Study of Fraction at 0 Corner around Switches to Firm with



Perc

ent

at C

orn

er


Predicted = 28.4%

Δ Corner in Savings = 1.0%

Predicted = 28.4%

20

40

60

80

100

-5 0 5

Individual Pensions

Total Savings



Changes in Individual Pension Contributions in Year of Firm Switch

For Individuals Contributing to Private Pensions in Prior Year P

erc

ent

of In

div

iduals

D Private Pension Contributions as a Percentage of Income

0

10

20

30

40

-3 -2 -1 0 1 2 3

Change Required to

Offset 3% Increase

Changes in Total Pension Contributions vs. Changes in Employer Pension Rates

for Firm Switchers Contributing Pensions Prior to Switch C

hange in T

ota

l P

ensio

n C

ontr

ibs.

(% o

f in

com

e)


Total Pensions


(0.2%)

-5

0

5

10

-5 0 5 10

Threshold-Based Analysis of Effect of Employer Provided Pension

on Total Pension Contributions A

ctu

al C

hange in F

raction A

bove T

hre

shold

Predicted Change in Fraction Above Threshold

-.4

-.2

0

.2

.4

.6

-.4 -.2 0 .2 .4 .6

Total Pensions


(0.1%)

Changes in Total Savings Rates vs. Changes in Employer Pension Rates

for Firm Switchers with Positive Savings Prior to Switch C

hange in T

ota

l S

avin

gs R

ate

(%

of in

com

e)

-5

0

5

10

Total Savings


(0.9%)


-5 0 5 10

Changes in Total Savings Rates vs. Changes in Wage Rates

for Firm Switchers with Positive Savings Prior to Switch

Percentage Change in Wage Rate

-50

0

50

100

-50 0 50 100

Change in T

ota

l S

avin

gs R

ate

(%

of in

com

e)

Marginal Propensity to Save: 10.2%

(0.1%)

Total Wealth Accrued from Switch to Retirement (Age 60)

vs. Changes in Employer Pension Rate at Switch Tota

l S

avin

g F

rom

Sw

itch to A

ge 6

0 (

% o

f E

arn

ings b

efo

re S

witch)

Change in Employer Pension Contributions (% of Income)

Δ Retirement Balance / Δ Emp. Pension = 5.81

(0.38)

-40

-20

0

20

40

60

-5 0 5

Sample: All Firm

Switches All Firm

Switches All Firm

Switches Mass Layoff

Large Changes

First Switch

Switch Ages 46-54

Dep. Var.:

Δ Pension

Rate

Δ Savings

Rate

Δ Savings

Rate

Δ Savings

Rate

Δ Savings

Rate

Δ Savings

Rate

Δ Retirement

Balance

(1) (2) (3) (4) (5) (6) (7)

Δ Emp. Pens. Contrib. Rate

0.947 (0.002)

0.900 (0.009)

0.888 (0.009)

0.865 (0.110)

0.897 (0.011)

0.832 (0.018)

5.806 (0.380)

Δ Wages 0.043

(0.001)

No. of Obs.

910,866 2,078,612 2,078,612 36,659 216,613 716,273 55,608

Employer Pensions: Pass-Through Estimates

Sample: All Firm

Switches Renters

All Firm Switches

Single Individuals

Dep. Var.:

Δ Net

Savings

Δ Savings

Rate

Δ Household

Savings

Δ Savings

Rate

(1) (2) (3) (4)

Δ Emp. Pens. Contrib. Rate

0.899 (0.014)

0.954 (0.013)

0.868 (0.010)

0.911 (0.015)

No. of Obs. 1,858,297 941,450 2,024,950 793,188

Employer Pensions: Pass-Through Estimates

Robustness Checks

Impacts of Government Policies on Savings


Automatic Contribution Price Subsidy

Raises Pension

Contribs.

M+P?

Raises Total

Savings

M+P+S?

Raises Pension

Contribs.

M+P?

Raises Total

Savings

M+P+_S?



Data Yes Yes ? ?

Mandated Savings (M) Around Eligibility Threshold in 1998 M

andate

d S

avin

gs (

DK

r)

0

2000

4000

6000

14.5 24.5 34.5 44.5 54.5 Income (DKr 1000s)

Effect on Mandate on Total (Non-Employer) Savings: Threshold Approach

Empirical

Income (DKr 1000s)

34

36

38

40

42

44

14.5 24.5 34.5 44.5 54.5

Perc

ent

with N

on-E

mplo

yer

Savin

gs >

1962 D

Kr

Effect on Mandate on Private Savings:

Threshold Approach P

erc

ent

with N

on-E

mplo

yer

Savin

gs >

1962 D

Kr

Empirical Predicted with 100% Pass-Through

Income (DKr 1000s)

34

36

38

40

42

44

14.5 24.5 34.5 44.5 54.5

Private Savings


(27%)

Dep. Var.:

Δ Total

Pensions

% with Total

Pensions >

Mean

Δ Total

Ind.

Savings

% with Total

Ind. Savings

> Mean

Δ Total

Savings

% with Total

Savings >

Mean

(1) (2) (3) (4) (5) (6)

Pass-Through

Estimate

0.946

(0.251)

0.862

(0.172)

-2.248

(14.692)

1.172

(0.271)

2.771

(1.744)

1.149

(0.290)

Research

Design RD RD RD RD RD RD

No. of Obs 37,616 183,001 92,872 156,157 92,186 156,157

Mandated Savings Plan: Pass-Through Estimates


Capital Pensions

Pre-1999 Post-1999


bracket

Interim Capital Gains Tax ~20% ~20%



Capital Pensions

Pre-1999 Post-1999


bracket

Interim Capital Gains Tax ~20% ~20%


Gross Income Prior to Pension Contribution (DKr 1000s)

Note: $1 6 DKr

1998

1999

Treated group Control group

DSubsidy = -14%

Subsidy for Capital Pensions in 1999 S

ubsid

y f

or

Capital P

ensio

n C

ontr

ibs.

175 200 225 250 275 300 325

0

20%

40%

60%


1996

Capital P

ensio

n C

ontr

ibution (

DK

r)


0

5000

10000

15000

-75000 -50000 -25000 0 25000 50000 75000


1996 1997

Capital P

ensio

n C

ontr

ibution (

DK

r)

0

5000

10000

15000

-75000 -50000 -25000 0 25000 50000 75000



1996 1997 1998

Capital P

ensio

n C

ontr

ibution (

DK

r)

0

5000

10000

15000

-75000 -50000 -25000 0 25000 50000 75000



1996

1999

1997 1998

Capital P

ensio

n C

ontr

ibution (

DK

r)

0

5000

10000

15000

-75000 -50000 -25000 0 25000 50000 75000



1996

1999

1997

2000

1998

Capital P

ensio

n C

ontr

ibution (

DK

r)

0

5000

10000

15000

-75000 -50000 -25000 0 25000 50000 75000



1996

1999

1997

2000

1998

2001

Capital P

ensio

n C

ontr

ibution (

DK

r)

0

5000

10000

15000

-75000 -50000 -25000 0 25000 50000 75000


Impact of Subsidy Reduction On Individual Capital Pension Contribs. C

apital P

ensio

n C

ontr

ibution (

DK

r)

25-75K Below Top Tax Cutoff 25-75K Above Top Tax Cutoff

Subsidy for Capital

Pension Reduced

DD Impact Estimate: β = - 2439.2

(97.65)

Year

2000

3000

4000

5000

6000

1995 1996 1997 1998 1999 2000 2001 2002


Capital Pension Contributions for Prior Contributors 0

20

40

60

-100 -80 -60 -40 -20 0 20 40 60 80 100

1997 to 1998

Perc

ent

of In

div

iduals



Capital Pension Contributions for Prior Contributors 0

20

40

60

-100 -80 -60 -40 -20 0 20 40 60 80 100

1997 to 1998 1998 to 1999

Perc

ent

of In

div

iduals


Effect of 1999 Reform on Fraction of Capital Pension Contributors by Year

for Individuals Contributing Prior to Reform P

erc

ent

Still

Contr

ibuting t

o C

apital P

ensio

n

Years Since 1999 Reform

0

20

40

60

80

100

0 2 4 6 8 10

Impact of Capital Pension Subsidy Reduction On Annuity Pension Contributions


Annuity P

ensio

n C

ontr

ibution (

DK

r)

Year

0

1000

2000

3000

4000

1995 1996 1997 1998 1999 2000 2001 2002

Subsidy for Capital

Pension Reduced

Annuity Pension

Offset: β = 56%

(4.7%)

Impact of Capital Pension Subsidy Reduction On Total Pension Contributions


Tota

l P

ensio

n C

ontr

ibution (

DK

r)

Year

Subsidy for Capital

Pension Reduced

3000

4000

5000

6000

7000

1995 1996 1997 1998 1999 2000 2001 2002

Impact of Capital Pension Subsidy Reduction On Total Pension Contributions


Tota

l P

ensio

n C

ontr

ibution (

DK

r)

Total Pensions

Pass-Through Rate: β = 44%

(4.7%)

Year

Subsidy for Capital

Pension Reduced Change in Capital Pensions

3000

4000

5000

6000

7000

1995 1996 1997 1998 1999 2000 2001 2002

Impact of Capital Pension Subsidy Reduction On Taxable Savings


Taxable

Savin

gs (

DK

r)

Year

Subsidy for Capital

Pension Reduced

Change in

Total Pensions

2000

4000

6000

8000

10000

1995 1996 1997 1998 1999 2000 2001 2002

10000

15000

20000

25000

30000

35000

Tota

l P

ensio

ns (

DK

r)

-75000 -50000 -25000 0 25000 50000 75000

Before Reduction in Subsidy




10000

15000

20000

25000

30000

35000

Tota

l P

ensio

ns (

DK

r)

-75000 -50000 -25000 0 25000 50000 75000




Before Reduction in Subsidy After Reduction in Subsidy

Total Pensions

Year

Tota

l P

ensio

ns R

K C

oeffic

ient

.005

.01

.015

.02

1996 1997 1998 1999 2000 2001



Total Pensions Taxable Savings

Year

Taxable

Savin

gs R

K C

oeffic

ient

Tota

l P

ensio

ns R

K C

oeffic

ient

Crowd-Out Parameter: β = -0.98

(0.22)

-.008

-.005

-.002

.001

.004

.005

.01

.015

.02

1996 1997 1998 1999 2000 2001



Change in Total Pension Contributions

Post-Reform (1999-2001) minus Pre-Reform (1996-1998) C

hange in T

ota

l P

ensio

ns (

DK

r)


-2000

-1500

-1000

-500

0

-75000 -50000 -25000 0 25000 50000 75000

Change in Slope at Cutoff = - 9.9 / 1000

(1.2)

Total Pensions Pass-Through Rate

Δ Tot. Pens. / Δ Cap. Pens.: β = 0.48

(0.05)

Change in Taxable Savings

Post-Reform (1999-2001) minus Pre-Reform (1996-1998) C

hange in T

axable

Savin

gs (

DK

r)


-800

-400

0

400

-75000 -50000 -25000 0 25000 50000 75000

Crowd-Out of Pension Contribution

ΔTaxable Saving / Δ Pension Contrib.:

β = -1.47 (0.67)

Change in Slope at Cutoff = 5.9 / 1000

(2.8)

Change in Fraction with Above-Median Savings

Post-Reform (1999-2001) minus Pre-Reform (1996-1998)


Change in %

with T

axable

Savin

gs A

bove M

edia

n

-1.2

5

-.75

-.25

.25

.75

1.2

5

-75000 -50000 -25000 0 25000 50000 75000

Crowd-Out of Pension Contribution

ΔTaxable Saving / Δ Pension Contrib.:

β = -0.98 (0.22)

Ch. in Slope at Cutoff = 0.019% / 1000

(0.004%)

Consider impacts of a DKR 1000 increase in pre-tax income

DKR 10.0 less contributed to retirement accounts when subsidy fell

MTR of 60% disposable income rises by 0.4 x 10.0 = DKR 4.0

DKR 3.92 of this is deposited in taxable savings

DKR 0.08 is consumed net saving falls by DKR 0.08

98% of the increase in pension contributions due to subsidies is financed

by offsetting reductions in savings in taxable accounts

Based on this estimate, we calculate that each DKr 1 of tax expenditure

on subsidies raises total saving by less than 1 cent

Crowd-Out Estimates

Difference-in-Differences Regression Kink

Annuity Contrib.

Total Pensions Contrib.

Taxable Savings

Taxable Savings

Taxable Savings Threshold

(1) (2) (3) (4) (5)

Capital Pension Contrib.

-0.562 (0.047)

0.438 (0.047)

Total Pension Contrib.

0.867 (2.453)

-1.471 (0.665)

-0.980 (0.222)

No. of Obs. 4,697,656 4,697,656 4,697,656 7,011,068 7,011,068

Pension Subsidy Pass-Through Estimates

Use pass-through of automatic contribs. and extensive-margin response

to subsidy to quantify degree of active response

Employer Pensions: 1 minus pass-through = 16.8%

Mandated Savings Plan: 1 minus pass-through = 13.8%

Subsidy Reduction: fraction who reoptimize pension = 17.4%

Passive

0 1

Active

SUBSIDY

MSP

ESP

.17 .14

response to M and t

Heterogeneity: Active vs. Passive Savers

Impact of Subsidy Change: Old vs. New Contributors

Year

Old Contributors New Contributors

% C

ontr

ibuting t

o C

apital P

ensio

ns

0

20

40

60

80

100

1998 1999

Impact of Subsidy Change: Old vs. New Contributors

Year

Old Contributors New Contributors

% C

ontr

ibuting t

o C

apital P

ensio

ns

0

20

40

60

80

100

1998 1999

Percent Responding to Capital Pension Subsidy Change in 1999

by Frequency of Active Changes in Other Years 0

5

10

15

20

25

0 20 40 60 80 100


% E

xitin

g C

apital P

ensio

n a

nd R

ais

ing A

nnuity in 1

999

b = 0.153

(0.005)

Pass-Through of Employer Pension Changes for Firm-Switchers

by Frequency of Active Changes in Other Years

Pass-T

hro

ugh o

f E

mp. P

ensio

ns t

o T

ota

l P

ensio

ns

0 20 40 60 80 100

88

90

92

94

96

98


b = - 0.076

(0.005)

Heterogeneity in Response to Capital Pension Subsidy by Wealth/Income Ratio

Wealth/Income Ratio in 1998

10

15

20

25

0 .5 1 1.5

b = 7.1

(0.4)

% E

xitin

g C

apital P

ensio

n a

nd R

ais

ing A

nnuity in 1

999

Heterogeneity in Pass-Through of Employer Pensions by Wealth/Income Ratio

Wealth/Income Ratio in Year Prior to Switch

Pa

ss-T

hro

ugh o

f E

mplo

yer

Pensio

ns t

o T

ota

l S

avin

gs

40

60

80

100

120

0 .5 1 1.5 2

b = - 20.8

(4.10)



Subsidy Response

60

80

100

8

10

12

14

16

20s 30s 40s 50s

Pass-T

hro

ugh o

f E

mplo

yer

Pensio

ns t

o T

ota

l S

avin

gs

% E

xte

nsiv

e M

arg

in S

ubstitu

tion in 1

999



Subsidy Response Employer Pension Pass-Through

60

80

100

8

10

12

14

16

20s 30s 40s 50s

Pass-T

hro

ugh o

f E

mplo

yer

Pensio

ns t

o T

ota

l S

avin

gs

% E

xte

nsiv

e M

arg

in S

ubstitu

tion in 1

999

Dep. Var.: Exits Capital Pension and Increases Annuity Contribution in 1999?

(1) (2) (3) (4) (5) (6)

W / Y Ratio 0.071

(0.004)

0.062

(0.004)

0.060

(0.004)

0.057

(0.004)

0.053

(0.004)

Age 0.002

(0.0001)

0.002

(0.0001)

0.002

(0.0001)

0.002

(0.0001)

0.002

(0.0001)

College 0.030

(0.004)

0.027

(0.003)

0.015

(0.004)

Economics

Education

0.072

(0.007)

0.055

(0.007)

Controls X

No. of Obs. 62,641 62,641 62,641 62,641 62,641 62,641

Mean of Dependent Variable: 11.6%

Observable Heterogeneity in Response to 1999 Subsidy Reduction

Your ATP rate pension [MSP]

Value as of Jan 1. 2004

Return in 2004

Tax on return in 2004

Administrative costs in 2004

Contribution in 2003

Net return on your contribution

Value as of Jan 1. 2005

6,722.59

750.49

-93.56

-37.92

3,349.00

66.89

10,757.49

Dkr.

Dkr.

Dkr.

Dkr.

Dkr.

Dkr.

Dkr.

Balance Test 1: Income Distribution Around Eligibility Threshold

0

1000

2000

3000

4000

5000

6000

Num

ber

of Taxp

ayers

in I

ncom

e B

in

14.5 24.5 34.5 44.5 54.5 Income (DKr 1000s)

Balance Test 2: Fraction Attending College Around Threshold

0

3

6

9

12

15

Perc

ent A

ttendin

g C

olle

ge

14.5 24.5 34.5 44.5 54.5

RD Estimate: b = 0.25%

(0.30%)

Income (DKr 1000s)

Total Non-Employer Savings Around Eligibility Cutoff in 1998

Income (DKr 1000s)

Change in N

on-E

mplo

yer

Savin

gs

-7000

-6000

-5000

-4000

-3000

14.5 24.5 34.5 44.5 54.5

RD estimates only apply to a low-income group of individuals

Now show that similar results are obtained throughout income

distribution using a difference-in-differences design

Note that MSP was terminated in 2004

Government Mandated Savings Plan

Mandatory Pension Contributions (M) by Income Group

0

1000

2000

3000

4000

Mandate

d S

avin

gs (

DK

r)

1995 2000 2005 2010 Year

Bottom Tercile Middle Tercile Top Tercile

1% MSP

Terminated 1% MSP

Introduced

Total Non-Employer Pension Contributions by Income Group In

div

idual (N

on-E

mp

loyer)

Pensio

n C

ontr

ibs.

(DK

r)

Year


0

2000

4000

6000

8000

10000

1995 2000 2005 2010

Pass-Through Rate to

Total Indiv. Pensions: β = 91.1%

(3.0%)

Percent of Individuals Contributing More than 1.5% of Income to Pensions P

erc

ent

of

Indiv

iduals

Year


10

20

30

40

1995 2000 2005 2010

Pass-Through Rate to

Total Indiv. Pensions: β = 101%

(2.2%)

Total Savings by Income Group

0

5000

10000

15000

20000

1995 2000 2005 2010 Year

Tota

l S

avin

gs (

DK

r)


25

30

35

40

1995 2000 2005 2010

Perc

ent

of In

div

iduals

Year


Effect of Mandate on Fraction of Individuals with Total Non-Employer Savings > 4%

Threshold-Based Analysis of Effect of Employer Provided Pension

on Total Savings Rates A

ctu

al C

hang

e in S

avin

gs R

ate

Predicted Change in Savings Rate

Total Savings


(0.4%)

-.2

0

.2

.4

-.2 0 .2 .4

Documents

Active vs. Passive Decisions and Crowd-out in Retirement ......Jan 13, 2013 · DKR 0.08 is consumed net saving falls by DKR 0.08 98% of the increase in pension contributions due