Research from Department of Economics featured in The New York Times

How can the government make people save more for retirement? The New York Times cites joint research from the Department of Economics and Harvard arguing that tax incentives for pension savings have little effect on total savings. The researchers – Raj Chetty and John N. Friedman of Harvard, Søren Leth-Petersen and Tore Olsen of the University of Copenhagen, and Torben Heien Nielsen of the Danish National Center for Social Research -  found that every Kroner that the Danish government spent on tax breaks had a negligible effect on total savings. In contrast, policies that automatically saved a portion of a worker’s income, such as the Special Pension (SP) and labor market pension schemes, increased total savings by a substantial amount.

The analysis, based on Danish administrative register data with more than 45 million observations, shows that about 85 percent of Danes were “passive” savers, who tended to be less responsive to government policies and also less wealthy. The remaining 15 percent were “active” savers, who were more responsive and richer. When the government reduced a tax break for retirement savings, passive savers barely changed their behavior. By contrast, automatic savings programs had more impact on them, causing the passive savers to put away more money for retirement. Active savers also responded to tax breaks that change — but by shifting money between accounts that come with tax advantages and other accounts, not by changing the amount they put away. The automatic savings programs also had little effect on active savers’ overall balances.

These results are timely in relation to current US debate about the so called Fiscal Cliff,  where government expenditure cuts and tax cuts scheduled to run out will  give a drastic hit to the economy from January 2013. The money that the government spends to encourage Americans to save for retirement is money that cannot be spent on deficit reduction, education, health care or other priorities, and the study suggests that these money are not well spent.

Link to New York Times: http://economix.blogs.nytimes.com/2012/11/25/study-questions-tax-breaks-effect-on-retirement-savings/