by Daniel Reck, University of Michigan
Recent empirical evidence suggests that many individuals save only passively, for example by sticking with their employer’s default savings plan or failing to offset changes in employer savings contributions. Most work to date on this question has focused on detecting failures of neoclassical models of savings behavior, with comparatively little work on the life cycle consequences of these phenomena. This project takes a life cycle perspective on passive saving, using data from Danish tax records and, where possible, data on savings in 401(k) accounts in the United States. First, we examine the consequences of passive savings for retirement timing. We identify passive savers by observing whether individuals offset changes in contributions to their employer-administered pensions triggered by job changes, and then we observe retirement behavior as a function of the change in pension contributions. Second, we use a similar empirical design to ask whether and how individuals correct their mistakes after some period of time. For example, do passive savers experiencing a relatively large decrease in their employer contribution correct their mistakes by saving more later on? Third, we use data from the U.S. and Denmark to estimate the distribution of optimal savings rates for passive savers, by examining the savings rates of active savers – who are presumed to save optimally – and modelling selection between active and passive populations. We use the results to understand the welfare implications of various savings policies.