Tax Preferences and Mandates: Is the Danish Savings Experience Applicable to the United States?

In an environment where lawmakers are struggling to raise tax revenue, public-policy tax “expenditures” have come under heavy scrutiny. In particular, tax preferences to boost retirement savings in employer-provided retirement plans has been at the center of such discussions. A recent study by Chetty et al., based on data from Denmark, has called into question the usefulness of such retirement tax expenditures in boosting savings. Using quasi-experiments, rich data, and robust statistical methods, the authors of the Danish study offered evidence that changes in the tax preferences for the Danish work place retirement savings plans had virtually no effect on total savings. This has prompted discussions in the United States about the possible modification of tax preferences for employment-based retirement savings plans in this country. This paper examines whether the findings from Denmark are relevant to the United States. The two retirement systems have some similarities but also major differences -- mainly that, unlike in the United States, in Denmark the availability of employment-based, tax-deferred retirement plans is not tied to the tax-deferred status of the accounts. However, aside from the differences in incentive structures between the two countries, the EBRI paper notes that the study of Danish workers examined only the impact that changes in tax incentives for work place retirement plans might have on worker savings behaviors -- but did not address how employers might react to changes in retirement savings tax incentives. Evidence suggests U.S. employers would react negatively to a loss of tax incentives by reducing or ending their retirement plans. Unless the behavior of both employers and workers are considered, the likely effects of any change in tax preference for retirement plans are speculative, at best. Finally, while the study of Danish savings behaviors presented the impact of tax-incentives and the “nudges” of automatic mandatory savings as an “either/or” solution, the optimal solution -- certainly for a voluntary system such as the one currently in place in the United States -- may well be a combination of the two.The PDF for the above title, published in the January 2013 issue of EBRI Notes, also contains the fulltext of another January 2013 EBRI Notes article abstracted on SSRN: “Views on Health Coverage and Retirement: Findings from the 2012 Health Confidence Survey.®”