Summary
Many countries have introduced reforms to encourage private savings to address the issue of undersaving for retirement.
How efficient are tax incentives?
Today, countries differ in the tax treatment of retirement savings. In the US for example, in 401(k) accounts, contributions are made with pre-tax income – contributions are deductible from income tax – and withdrawals from the account are included in the savers’ taxable income. An alternative structure (Roth IRA) permits post-tax income contributions to the saving plan. In this case, withdrawals from the plan are not taxed.
Procrastination: do we need more automatic enrolment?
If a proportion of people are passive savers or procrastinate, would the introduction of an auto-enrolment solution paying, for example, a percentage of salary directly into a retirement savings plan be effective? In the short term, certainly. Several academic studies attest to this: switching from a voluntary to an automatic enrolment scheme can double the participation rate in retirement savings plans.
Should retirement savings be locked?
Many retirement saving vehicles, such as the Retirement Savings Plan (Plan d’épargne retraite, PER) in France, lock in the money until retirement, unless there are exceptional reasons for withdrawal (such as purchase of principal residence, unemployment or over indebtedness). Locking in savings can be an obstacle, particularly for young people, for whom retirement is still a long way off and who are highly uncertain about their liquidity needs. This raises the question of the optimal degree of liquidity for retirement savings plans. If the plan is ‘too’ liquid, individuals may be tempted to consume their savings before retirement. But if they have a strong preference for liquidity, offering them the possibility of easy access to their funds in case of need can be an incentive to save.
Raising pension saving awareness
Evidence on the effectiveness of retirement information provision and financial education is mixed. Some experiments show that providing easily accessible information on one's pension entitlements has a significant impact. In Germany, for example, a policy of systematic information on pension entitlements was introduced between 2002 and 2005, with annual letters presenting projected retirement incomes for all individuals over the age of 27. This reform led to an increase in tax-deductible retirement savings and a rise in earned income.
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