Employer Pensions: Pass-Through Estimates Switch All Firm All Firm All Firm Mass Large First Sample: Ages Switches Switches Switches Layoff Changes Switch 46-54 Δ Δ Δ Δ Δ Δ Δ Dep. Var.: Pension Savings Savings Savings Savings Savings Retirement Rate Rate Rate Rate Rate Rate Balance (1) (2) (3) (4) (5) (6) (7) Δ Emp. Pens. 0.947 0.900 0.888 0.865 0.897 0.832 5.806 Contrib. (0.002) (0.009) (0.009) (0.110) (0.011) (0.018) (0.380) Rate 0.043 Δ Wages (0.001) No. of 910,866 2,078,612 2,078,612 36,659 216,613 716,273 55,608 Obs.
Impacts of Mandates Employer pensions provide good identifying variation but may not be identical to impacts of government policies For instance: workers may be more willing to change consumption plans when switching firms In the paper, we also directly study a mandate imposed by Danish government in 1998 Required individuals above eligibility threshold of DKr 35,000 to contribute 1% of savings to mandatory savings account Estimate impacts using RD and DD designs Main finding: $1 contribution to mandatory savings plan ~ $1 increase in pensions and total savings
Mandated Savings (M) Around Eligibility Threshold in 1998 6000 Mandated Savings (DKr) 4000 2000 0 14.5 24.5 34.5 44.5 54.5 Income (DKr 1000s)
Effect on Mandate on Total (Non-Employer) Savings: Threshold Approach Percent with Non-Employer Savings > 1962 DKr 44 42 40 38 36 34 14.5 24.5 34.5 44.5 54.5 Income (DKr 1000s) Empirical
Effect on Mandate on Total (Non-Employer) Savings: Threshold Approach Percent with Non-Employer Savings > 1962 DKr 44 42 40 38 36 Private Savings Pass-Through Rate: b = 117% (27%) 34 14.5 24.5 34.5 44.5 54.5 Income (DKr 1000s) Empirical Predicted with 100% Pass-Through
Impacts of Government Policies on Saving for Active vs. Passive Savers Autom omat atic ic Contribu ntributio tion Price ice Subsidy sidy Raises Pension Raises Total Raises Pension Raises Total Contribs. Saving Contribs. Saving M+P? M+P+S? M+P? M+P+_S? Active Savers No No Yes Uncertain Passive Savers Yes Uncertain No No Data Yes Yes ? ?
Part 2 Impacts of Subsidies for Retirement Saving
Impact of Subsidies 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
Taxation of Capital Pensions Pre-1999 14% 4% if in top tax Tax At Time of Contribution 0% bracket et Tax on Capital Gains ~20% ~20% Tax on Payout 40% 40%
Taxation of Capital Pensions Pre-1999 Post-1999 14% 4% if in top tax Tax At Time of Contribution 0% bracket et Tax on Capital Gains ~20% ~20% Tax on Payout 40% 40%
Subsidy for Capital Pensions in 1999 60% Subsidy for Capital Pension Contribs. Note: $1 6 DKr 40% Control group Treated group 1998 D Subsidy = -14% 20% 1999 0 175 200 225 250 275 300 325 Gross Income Prior to Pension Contribution (DKr 1000s)
Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs. 15000 Capital Pension Contribution (DKr) 10000 5000 0 -75000 -50000 -25000 0 25000 50000 75000 Income Relative to Top Tax Cutoff (DKr) 1996
Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs. 15000 Capital Pension Contribution (DKr) 10000 5000 0 -75000 -50000 -25000 0 25000 50000 75000 Income Relative to Top Tax Cutoff (DKr) 1996 1997
Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs. 15000 Capital Pension Contribution (DKr) 10000 5000 0 -75000 -50000 -25000 0 25000 50000 75000 Income Relative to Top Tax Cutoff (DKr) 1998 1996 1997
Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs. 15000 Capital Pension Contribution (DKr) 10000 5000 0 -75000 -50000 -25000 0 25000 50000 75000 Income Relative to Top Tax Cutoff (DKr) 1998 1996 1997 1999
Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs. 15000 Capital Pension Contribution (DKr) 10000 5000 0 -75000 -50000 -25000 0 25000 50000 75000 Income Relative to Top Tax Cutoff (DKr) 1998 1996 1997 1999 2000
Impact of 1999 Capital Pension Subsidy Reduction On Capital Pension Contribs. 15000 Capital Pension Contribution (DKr) 10000 5000 0 -75000 -50000 -25000 0 25000 50000 75000 Income Relative to Top Tax Cutoff (DKr) 1998 1996 1997 1999 2000 2001
Impact of 1999 Capital Pension Subsidy Reduction on Distribution of Capital Pension Contributions for Prior Contributors 60 Percent of Individuals 40 20 0 -100 -80 -60 -40 -20 0 20 40 60 80 100 Percentage Change in Capital Pension Contributions (P t – P t-1 )/ P t-1 1997 to 1998
Impact of 1999 Capital Pension Subsidy Reduction on Distribution of Capital Pension Contributions for Prior Contributors 60 Percent of Individuals 40 20 0 -100 -80 -60 -40 -20 0 20 40 60 80 100 Percentage Change in Capital Pension Contributions (P t – P t-1 )/ P t-1 1997 to 1998 1998 to 1999
Effect of 1999 Reform on Fraction of Capital Pension Contributors by Year for Individuals Contributing Prior to Reform 100 Percent Still Contributing to Capital Pension 80 60 40 20 0 0 2 4 6 8 10 Years Since 1999 Reform
Impacts of Government Policies on Saving for Active vs. Passive Savers Autom omat atic ic Contribu ntributio tion Price ice Subsidy sidy Raises Pension Raises Total Raises Pension Raises Total Contribs. Saving Contribs. Saving M+P? M+P+S? M+P? M+P+S? Active Savers No No Yes Uncertain (Neoclassical) Passive Savers Yes Uncertain No No Data Yes Yes Yes ?
Crowd-out of Retirement Savings Two crowd-out parameters of interest 1. Shifting across pension accounts What happens to each $1 taken out of capital pensions? 55% goes to annuity pension, 45% taken out of pension Relevant parameter for impacts of a policy that targets one type of retirement account (e.g. firm match for 401k)
Crowd-out of Retirement Savings Two crowd-out parameters of interest 1. Shifting across pension accounts What happens to each $1 taken out of capital pensions? 55% goes to annuity pension, 45% taken out of pension Relevant parameter for impacts of a policy that targets one type of retirement account (e.g. firm match for 401k) 2. Shifting from pension accounts to taxable savings accounts What happens to each $1 taken out of pension savings? Relevant parameter for determining overall impact of retirement savings subsidies on total savings
Shifting from Retirement to Taxable Savings Use change in capital pension subsidy as an instrument for total pension contributions $1 reduction in capital pensions 45 cent reduction in total pensions Does this 45 cents go into consumption or saving in taxable accounts? To estimate crowdout, exploit sharp change in marginal incentives at top bracket in 1999 Does marginal propensity to save in taxable accounts rise when individuals cross into top bracket after 1999? Implement using regression-kink design
Total Pensions vs. Income: 35000 Before Reduction in Capital Pension Subsidy 30000 Total Pensions (DKr) 25000 20000 15000 Change in slope = +0.017 10000 -75000 -50000 -25000 0 25000 50000 75000 Income Relative to Top Tax Cutoff (DKr)
Change in Marginal Propensity to Save in Retirement and Non-Retirement Accounts at Top Tax Cutoff by Year .02 Δ MPS in Pensions: β = -1.00% (0.11) Total Pensions RK Coefficient .014 .008 .002 1996 1997 1998 1999 2000 2001 Year Total Pensions
Change in Marginal Propensity to Save in Retirement and Non-Retirement Accounts at Top Tax Cutoff by Year -.002 .02 Δ MPS in Pensions: β = -1.00% Taxable Savings Thresh. RK Coefficient (0.11) Total Pensions RK Coefficient -.004 .014 -.006 .008 Δ MPS in Tax. Saving: β = 0.39% -.008 .002 (0.09) 1996 1997 1998 1999 2000 2001 Year Taxable Savings Total Pensions Threshold
Crowd-Out Estimates Consider impacts of a DKR 1000 increase in pre-tax income DKR R 10.0 .0 less contributed to retirement accounts when subsidy fell MTR of 60% disposable income rises by 0.4 x 10.0 = DKR KR 4.0 DKR R 3.9 9 of this is deposited in taxable savings 1 is consumed net saving falls by DKR 0.1 DKR R 0.1 98% of the change in pension contributions due to subsidies is financed by offsetting changes in savings in taxable accounts Based on this estimate, we calculate that each DKr 1 of tax expenditure on subsidies raises personal saving by less than 1 cent
Impacts of Government Policies on Savings for Active vs. Passive Savers Autom omat atic ic Contribu ntributio tion Price ice Subsidy sidy Raises Pension Raises Total Raises Pension Raises Total Contribs. Savings Contribs. Savings M+P? M+P+S? M+P? M+P+S? Active Savers No No Yes Uncertain Passive Savers Yes Uncertain No No Data Yes Yes Yes No No
Interaction Between Subsidy and Auto. Contributions Do automatic contributions raise saving more when subsidies are larger? We estimate interaction effect using two sources of variation in subsidy Pre vs. post 1999 for those in top bracket Below vs. above tax bracket cutoffs Pass-through of employer contributions very similar in all cases Change in subsidy of 14 cents per DKr (50% reduction) has no impact on efficacy of automatic contributions
Part 3 Identifying Active vs. Passive Savers
Heterogeneity: Active vs. Passive Savers Are differences between impacts of automatic contributions and subsidies driven by active vs. passive choice? Test the mechanism by analyzing heterogeneity of responses across individuals
Heterogeneity: Active vs. Passive Savers Recall that roughly 15% of agents respond actively to all 3 policies SUBSIDY ESP MSP Passive Active 0 1 .14 .17 response to M and t 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%
Heterogeneity: Active vs. Passive Savers Test active vs. passive choice mechanism by analyzing 3 predictions [State dependence] Individuals should respond more to subsidy 1. when actively changing pensions for other reasons Test if new pension contributors allocate more money to annuity accounts than capital accounts than prior contributors
Impact of Subsidy Change: Old vs. New Contributors 100 % Contributing to Capital Pensions 80 60 40 20 0 1998 1999 Year Old Contributors New Contributors
Impact of Subsidy Change: Old vs. New Contributors 100 % Contributing to Capital Pensions 80 60 40 20 0 1998 1999 Year Old Contributors New Contributors
Heterogeneity: Active vs. Passive Savers Test active vs. passive choice mechanism by analyzing 3 predictions [State dependence] Individuals should respond more to subsidy 1. when actively changing pensions for other reasons [Types] Individuals who optimize actively should respond to 2. subsidy and undo automatic contributions to a greater degree Proxy for active optimization: frequency of changes in pension contributions in other years
Percent Responding to Capital Pension Subsidy Change in 1999 b y Frequency of Active Changes in Other Years % Exiting Capital Pension and Raising Annuity in 1999 25 20 15 10 5 b = 0.153 (0.005) 0 0 20 40 60 80 100 Percentage of Other Years with Change in Individual Pension Contributions
Pass-Through of Employer Pension Changes for Firm-Switchers by Frequency of Active Changes in Other Years Pass-Through of Emp. Pensions to Total Pensions 98 b = - 0.076 (0.005) 96 94 92 90 88 0 20 40 60 80 100 Percentage of Other Years with Change in Individual Pension Contributions
Heterogeneity: Active vs. Passive Savers Test active vs. passive choice mechanism by analyzing 3 predictions [State dependence] Individuals should respond more to subsidy 1. when actively changing pensions for other reasons [Types] Active savers should respond to subsidy and undo 2. automatic contributions to a greater degree [Observable heterogeneity] Active savers likely to be those who are 3. already saving and planning for retirement Carroll et al. (2009): individuals with high discount rates both don ’ t save for retirement and delay financial planning
Heterogeneity in Response to Capital Pension Subsidy by Wealth/Income Ratio % Exiting Capital Pension and Raising Annuity in 1999 25 20 15 b = 7.1 (0.4) 10 0 .5 1 1.5 Wealth/Income Ratio in 1998
Heterogeneity in Pass-Through of Employer Pensions by Wealth/Income Ratio Pass-Through of Employer Pensions to Total Savings 120 b = - 20.8 (4.10) 100 80 60 40 0 .5 1 1.5 2 Wealth/Income Ratio in Year Prior to Switch
Heterogeneity in Responses to Subsidies and Employer Pensions by Age % Pass-Through of Employer Pensions to Total Savings % Exiting Capital Pension and Raising Annuity in 1999 100 16 14 80 12 10 60 8 20s 30s 40s 50s Age in Year of Subsidy Change (1999) or Firm Switch Subsidy Response
Heterogeneity in Responses to Subsidies and Employer Pensions by Age % Pass-Through of Employer Pensions to Total Savings % Exiting Capital Pension and Raising Annuity in 1999 100 16 14 80 12 10 60 8 20s 30s 40s 50s Age in Year of Subsidy Change (1999) or Firm Switch Subsidy Response Employer Pension Pass-Through
Heterogeneity in Responses to Subsidies by Educational Attainment % Exiting Capital Pension and Raising Annuity in 1999 20 15 10 5 0 No College College Education
Heterogeneity in Responses to Subsidies by Educational Attainment % Exiting Capital Pension and Raising Annuity in 1999 20 15 10 5 0 No College College Economics Training Education
Observable Heterogeneity in Response to 1999 Subsidy Reduction Dep. Var.: Exits Capital Pension and Increases Annuity Contribution in 1999? (1) (2) (3) (4) (5) (6) 0.071 0.062 0.060 0.057 0.053 W / Y Ratio (0.004) (0.004) (0.004) (0.004) (0.004) 0.002 0.002 0.002 0.002 0.002 Age (0.0001) (0.0001) (0.0001) (0.0001) (0.0001) 0.030 0.027 0.015 College (0.004) (0.003) (0.004) 0.072 0.055 Economics (0.007) (0.007) Education Controls X No. of Obs. 62,641 62,641 62,641 62,641 62,641 62,641 Mean of Dependent Variable: 11.6%
Implications for Retirement Savings Literature Two important strands of research have developed independently Crowd-out of retirement savings in non-retirement accounts Impacts of active vs. passive policies within retirement accounts These two issues are closely related Degree of crowd-out depends fundamentally on whether savings change is made actively or passively
Implications for Models of Consumption 1. MPC differs sharply by the form of compensation Increases in automatic pension contributions raise savings much more than increases in disposable income Difference is persistent over time even for large shocks 2. Data point to a “ Spenders/Savers ” model with heterogeneous agents 85% of individuals are “ spenders ” with cash-on-hand rule-of-thumb for consumption 3. Interest elasticity of savings is low for two reasons: Among “ savers, ” reductions in pension savings due to the cut in the subsidy almost entirely offset by increases in taxable savings 85% who are “ spenders ” not do respond to changes in the subsidy
Implications for Tax Policy Tax subsidies are ineffective at raising savings for three reasons: Spend money subsidizing the savings of the 85% who are passive 1. savers, who do not respond at all Crowd-out rates high among the 15% of active savers 2. Active savers are already saving at higher rates subsidies do not 3. target those who may be least prepared for retirement Automatic contributions resolve all three of these problems United States flow tax expenditure on tax-deferred savings accounts exceeds $125 billion [JCT 2012] Are these policies the best way to raise retirement savings?
Your ATP rate pension [MSP] Value as of Jan 1. 2004 6,722.59 Dkr. Return in 2004 750.49 Dkr. Tax on return in 2004 -93.56 Dkr. Administrative costs in 2004 -37.92 Dkr. Contribution in 2003 3,349.00 Dkr. Net return on your contribution 66.89 Dkr. Value as of Jan 1. 2005 10,757.49 Dkr .
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
Event Study of Fraction at 0 Corner around Switches to Firm with >3% Increase in Employer Pension Rate 100 Δ Zero Pension Contrib.= 1.4% Predicted = 28.4% 80 Δ Corner in Savings = 1.0% Percent at Corner Predicted = 28.4% 60 40 20 -5 0 5 Year Relative to Firm Switch Individual Pensions Predicted with Full Crowd-Out Total Savings Predicted with Full Crowd-Out
Employer Pensions: Pass-Through Estimates Robustness Checks All Firm All Firm Single Sample: Renters Switches Switches Individuals Δ Δ Δ Δ Dep. Var.: Net Savings Household Savings Savings Rate Savings Rate (1) (2) (3) (4) Δ Emp. Pens. 0.899 0.954 0.868 0.911 Contrib. Rate (0.014) (0.013) (0.010) (0.015) No. of Obs. 1,858,297 941,450 2,024,950 793,188
Balance Test 1: Income Distribution Around Eligibility Threshold 6000 5000 Number of Taxpayers in Income Bin 4000 3000 2000 1000 0 14.5 24.5 34.5 44.5 54.5 Income (DKr 1000s)
Balance Test 2: Fraction Attending College Around Threshold 15 12 Percent Attending College 9 6 3 RD Estimate: b = 0.25% (0.30%) 0 14.5 24.5 34.5 44.5 54.5 Income (DKr 1000s)
Total Non-Employer Savings Around Eligibility Cutoff in 1998 -3000 Change in Non-Employer Savings -4000 -5000 -6000 -7000 14.5 24.5 34.5 44.5 54.5 Income (DKr 1000s)
Government Mandated Savings Plan 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
Mandatory Pension Contributions (M) by Income Group 4000 1% MSP 1% MSP Terminated Introduced 3000 Mandated Savings (DKr) 2000 1000 0 1995 2000 2005 2010 Year Bottom Tercile Middle Tercile Top Tercile
Total Non-Employer Pension Contributions by Income Group Individual (Non-Employer) Pension Contribs. (DKr) 8000 10000 Pass-Through Rate to Total Indiv. Pensions: β = 91.1% (3.0%) 6000 4000 2000 0 1995 2000 2005 2010 Year Bottom Tercile Middle Tercile Top Tercile
Percent of Individuals Contributing More than 1.5% of Income to Pensions 40 Pass-Through Rate to Total Indiv. Pensions: β = 101% (2.2%) Percent of Individuals 30 20 10 1995 2000 2005 2010 Year Bottom Tercile Middle Tercile Top Tercile
Total Savings by Income Group 10000 15000 20000 Total Savings (DKr) 5000 0 1995 2000 2005 2010 Year Bottom Tercile Middle Tercile Top Tercile
Effect of Mandate on Fraction of Individuals with Total Non-Employer Savings > 4% 40 Percent of Individuals 35 30 25 1995 2000 2005 2010 Year Bottom Tercile Middle Tercile Top Tercile
Threshold-Based Analysis of Effect of Employer Provided Pension on Total Savings Rates .4 Actual Change in Savings Rate .2 0 Total Savings Pass-Through Rate: b = 96% (0.4%) -.2 -.2 0 .2 .4 Predicted Change in Savings Rate
Mandated Savings Plan: Pass-Through Estimates % with Total % with Total % with Total Δ Total Δ Total Ind. Δ Total Dep. Var.: Pensions > Ind. Savings > Savings > Pensions Savings Savings Mean Mean Mean (1) (2) (3) (4) (5) (6) Pass-Through 0.946 0.862 -2.248 1.172 2.771 1.149 Estimate (0.251) (0.172) (14.692) (0.271) (1.744) (0.290) RD RD RD RD RD RD Research Design No. of Obs 37,616 183,001 92,872 156,157 92,186 156,157
Impacts of Government Policies on Savings for Active vs. Passive Savers Autom omat atic ic Contribu ntributio tion Price ice Subsidy sidy Raises Pension Raises Total Raises Pension Raises Total Contribs. Savings Contribs. Savings M+P? M+P+S? M+P? M+P+S? Active Savers No No Yes Uncertain Passive Savers Yes Uncertain No No Data Yes Yes ? ?
Impact of Subsidy Reduction On Individual Capital Pension Contribs. 6000 DD Impact Estimate: β = - 2439.2 Capital Pension Contribution (DKr) (97.65) 5000 Subsidy for Capital Pension Reduced 4000 3000 2000 1995 1996 1997 1998 1999 2000 2001 2002 Year 25-75K Below Top Tax Cutoff 25-75K Above Top Tax Cutoff
Impact of Capital Pension Subsidy Reduction On Annuity Pension Contributions 4000 Annuity Pension Contribution (DKr) Subsidy for Capital Pension Reduced 3000 2000 Annuity Pension Offset: β = 56% (4.7%) 1000 0 1995 1996 1997 1998 1999 2000 2001 2002 Year 25-75K Below Top Tax Cutoff 25-75K Above Top Tax Cutoff
Impact of Capital Pension Subsidy Reduction On Total Pension Contributions 7000 Total Pension Contribution (DKr) 6000 5000 Subsidy for Capital 4000 Pension Reduced 3000 1995 1996 1997 1998 1999 2000 2001 2002 Year 25-75K Below Top Tax Cutoff 25-75K Above Top Tax Cutoff
Impact of Capital Pension Subsidy Reduction On Total Pension Contributions 7000 Total Pensions Pass-Through Rate: β = 44% Total Pension Contribution (DKr) 6000 (4.7%) 5000 Subsidy for Capital Change in Capital Pensions 4000 Pension Reduced 3000 1995 1996 1997 1998 1999 2000 2001 2002 Year 25-75K Below Top Tax Cutoff 25-75K Above Top Tax Cutoff
Impact of Capital Pension Subsidy Reduction On Taxable Savings 10000 Subsidy for Capital Pension Reduced 8000 Taxable Savings (DKr) 6000 Change in Total Pensions 4000 2000 1995 1996 1997 1998 1999 2000 2001 2002 Year 25-75K Below Top Tax Cutoff 25-75K Above Top Tax Cutoff
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