How Will Employers Respond to Changed Savings Incentives?

Proposed tax reform for retirement savings has led industry groups to speculate that employees will stop saving in employer plans if tax incentives are taken away, and that employers will stop offering retirement plans.

Tax reform on retirement savings has already happened in Denmark, and research published by the National Bureau for Economic Research (NBER) shows employers followed the lead of employees in their retirement-savings offerings.

In Denmark, employees contribute to both a capital savings account, which pays out benefits in a lump-sum, and an annuity account, which pays out an annuity. Employees cannot change the percentage they can put into these accounts, but they can change the allocation of their contributions between them.

In 2009, Denmark passed reform that made the capital savings accounts less tax-advantaged for a greater number of employees. Employees for whom the tax advantage was reduced reallocated some of their contributions to the annuity account. The research shows employers did the same.

One question left unanswered by the research is whether this was a result of employer paternalism and benevolence for the reduced incentive for employees, or whether employers changed their plans to be more competitive in the market for employees. Either way, it shows employees’ actions dictated the change in employers’ actions.

The research paper may be purchased on downloaded for free at http://www.nber.org/papers/w21665.