New study questions the usefulness of tax preferences in retirement plans
By National Underwriter
By Warren S. Hersch
A recent study based on data from Denmark has called into question the usefulness of tax preferences to boost retirement savings in employer-provided retirement plans.
The Employee Benefit Research Institute, Washington, D.C., recaps in a January 2013 report the findings of a study of Danish workers. The Danish research explores the impact that changes in tax incentives for workplace retirement plans might have on worker saving behaviors. The Danish study also analyzed the impact of defaults in employer-provided pensions and government mandates on Danish savings patterns.
The Danish study, EBRI writes, found that most individuals did not change the amount of their voluntary contributions or savings in taxable accounts, but that an individual’s total savings immediately increased by 90 cents for every $1 increase in employer-provided pension contributions.
The study also examined the effect of a mandatory savings plan (MSP) that required all Danish citizens to contribute one percent of their earnings to a retirement savings account from 1998 until 2003. The report found that Danish workers saved what they were required to save, but no more.
The study additionally estimated the effect of government incentives on total savings by looking at the response to a 1999 reduction by the Danish government of the tax incentive for contributing to a capital pension account. The results, EBRI writes, indicate that the tax incentive had little or no effect on total savings of Danish workers, though the tax incentive did shift how those impacted by the changes in tax incentives chose to save.
Additionally, the study of Danish savers found that the 1999 incentive reduction had a much larger impact on those starting a new pension that year compared with those who were already making contributions; and it found that reduction in incentives had a larger effect on Danish workers who made frequent changes to their pension contributions.
“In essence, Danish savers who were actively making decisions about their pension contributions were more likely to respond to the change in incentives than other individuals,” EBRI notes in its recap on the Danish study.
Originally published on LifeHealthPro.com