Tax Policy and Retirement Savings

Abstract

Governments around the world spend hundreds of billions of dollars subsidizing retirement savings through various tax preferences. This chapter reviews the economics literature on retirement savings, with a particular focus on recent advances using behavioral economics and high-quality administrative data. This literature suggests that existing tax subsidies may not be an effective policy to increase retirement savings for three reasons. First, tax subsidies appear to primarily affect the allocation of savings across accounts, rather than the total amount of savings. Second, many savers are inattentive to tax policy when choosing the level of savings. Third, those savers most sensitive to tax subsidies are not those with the greatest savings inadequacy. These same forces suggest that alternative policies focusing on behavioral “nudges,” such as automatic enrollment and access to payroll-deduction accounts, may be more effective.

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