Do tax subsidies for retirement saving affect total private saving? New evidence on middle‐income workers*

• Published date: 01 October 2023
• Author: Camilla Skovbo Christensen,Bastian Emil Ellegaard
• Date: 01 October 2023
• DOI: http://doi.org/10.1111/sjoe.12540

Scand. J. of Economics 125(4), 933–955, 2023

DOI: 10.1111/sjoe.12540

Do tax subsidies for retirement saving affect

total private saving? New evidence on

middle-income workers*

Camilla Skovbo Christensen

Center for Economic Behavior and Inequality, University of Copenhagen, DK-1353

Copenhagen K, Denmark

csch@econ.ku.dk

Bastian Emil Ellegaard

University of Copenhagen, DK-1353 Copenhagen K, Denmark

bastian.joergensen@econ.ku.dk

Abstract

We exploit exogenous variation from a pension reform in Denmark to estimate the effect of tax

subsidies on total private saving. We present new evidence on individuals in the middle of the

income distribution and show that a reduction in tax subsidies for retirement saving reduces

total private saving. The reform changed the tax incentives for saving in the pension scheme

that holds the highest tax advantage for middle-income workers in Denmark. We f‌ind that for

each unit of reduced saving in this pension scheme, only 64 percent is substituted to other types

of saving.

Keywords: Crowd-out; savings; retirement; tax incentives; household f‌inance

JEL classif‌ication:H24; H31; D14; G51

1. Introduction

Governments spend substantial resources on tax subsidies for retirement

accounts to encourage private retirement saving. But can governments

actually affect total private saving using tax subsidies? Or do tax subsidies

simply cause a shift of saving between different types of savings accounts?

*We thank Søren Leth-Petersen, four anonymous referees, and participants at the European

Economic Association (EEA) Congress 2022, the Annual Congress of the International Institute

of Public Finance (IIPF) 2022, Oslo Fiscal Studies (OFS) workshop on Empirical Analysis

of Tax Policy 2022, the Annual Meeting of Society of Economics of the Household (SEHO)

2022, and seminars at University of Copenhagen as well as audiences at The Danish Ministry of

Finance, the Danish Central Bank, and Insurance and Pension Denmark for valuable comments

and suggestions. The paper builds upon our master’s thesis from 2020. The activities of the

Center for Economic Behavior and Inequality are f‌inanced by the Danish National Research

Foundation grant DNRF134.

c

2023 The Authors. The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of F¨

oreningen

f¨

or utgivande av the SJE.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution

and reproduction in any medium, provided the original work is properly cited.

934 Do tax subsidies for retirement saving affect total private saving?

The literature suggests that tax subsidies in retirement accounts are ineffective

at impacting total saving at the top end of the income distribution. We study

a policy for a pension scheme that targets individuals in the middle of the

income distribution and f‌ind different results.

Tax subsidies for saving in retirement accounts only increase private

saving if the change in retirement saving does not fully crowd out other types

of saving. Chetty et al. (2014) were the f‌irst to estimate the effect of tax

incentives on total saving through the use of high-quality administrative data

and exogenous variation from legislative changes. Andersen (2018) examines

the same question using another source of exogenous variation. Both papers

examine individuals at the top end of the income distribution, and neither

paper can reject full crowd-out. The results in the literature thus imply that

tax subsidies leave private saving unchanged. Yet, there is no empirical

evidence on the crowd-out responses of workers in the middle of the income

distribution. These workers are of particular interest as they are more likely

to have little savings and they are, therefore, likely to be key targets for the

government when the goal is to increase private saving.

In this paper, we use an unexploited source of variation and high-quality

administrative data to estimate the effect of tax subsidies on total private

saving of middle-income workers. We thus contribute to f‌illing an important

research gap and we provide new answers to the question about the effect of

tax subsidies on saving behavior. We analyze the effects of a reform of one of

the most popular private voluntary pension schemes among middle-income

workers in Denmark: the age pension scheme (aldersopsparing in Danish).

Private voluntary retirement saving accounts constitute one of three pillars

in the Danish pension system along with the state-provided def‌ined benef‌it

plan and employer-administered def‌ined contribution accounts. The system

is similar to those of other developed countries. The age pension scheme is

popular because it provides the largest tax benef‌it among available pension

schemes for middle-income workers. Originally, there was a tax subsidy for

contributions to the age pension scheme that was the same across cohorts.

In 2018, the Danish Government passed a bill that changed the contribution

limits to the age pension scheme. For workers with more than f‌ive years

to the retirement age, the annual contribution limit was reduced by 80

percent, and contributions above the limit are subject to a tax penalty. The

policy change represents a reduced tax subsidy for retirement saving for

those contributing to the age pension scheme. Thus, the reform induces

exogenous variation in workers’ incentives to contribute to the age pension

scheme.

The reform provides an ideal setting for analyzing the causal effect

of tax incentives due to a high degree of salience and comprehensible

incentives. We use comprehensive population-wide Danish administrative

data with information on individual saving, income, assets, and liabilities,

c

2023 The Authors. The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of F¨

oreningen

f¨

or utgivande av the SJE.