1. Tax Expenditures as Part of a Broad Strategy to Influence Saving May 19, 2009 William Gale

2. 2 Four ways to stimulate saving Mandates (e.g., Social Security) Incentives (AKA “tax expenditures”) Information (e.g., SS statement) Choice architecture (e.g., auto 401(k)) Not an either/or choice. The approaches could be substitutes or complements.

3. 3 The alternatives differ along several dimensions Effects on saving Fiscal costs Economic distortions Distributional effects Administrative complexity Scalability

4. 4 They also differ in how they aim to encourage saving Change outcomes directly (mandates, defaults) Change external constraints (incentives) Change people’s thinking and attitudes (information) So…what should saving policy “do”? Through which channels should saving policy aim to operate?

5. 5 Consider two types of consumers Neoclassical consumer –full information –fully rational –perfect implementer of plans Human –imperfect information –less than fully rational –imperfect implementer of plans

6. 6 Policy for neoclassical consumers Mandates will be offset (if not too big) Default settings will have no impact No need to provide information The only way to affect saving is through incentives

7. 7 Incentives for Neoclassical Consumers May be needed, since saving levels may be optimal privately, but not socially (due to an income tax, SS, Medicare, etc.) May be regressive May be expensive May not stimulate much net new saving

8. 8 Policy for Humans Mandates and default settings have real effects –Gets people into accounts or gets them benefits, but does not equip them to manage these outcomes Incentives can have real effects –Same caveats as for neoclassical consumers, AND –The incentives need to be understood Information is the potential solution to both of the problems above –Can leverage the impact of other policies –Is due to consumers who are affected by other policies –Is a complement to, not a substitute, for other interventions –is likely to be less expensive than incentives –is likely to be progressive

9. 9 Bottom Line Current tax incentives for saving –Are expensive –Are regressive –Are of questionable value in raising saving Could be leveraged much better –With design changes –Coupled with information and default settings

10. 10 For example Savers credit –Is poorly utilized and so does not serve its purpose But the following combination could work quite well –Revamp the credit as a refundable, fixed rate matching contribution into the account –Expand automatic enrollment in 401(k)s and IRAs –Educate workers on the value of saving and how to manage assets

11. 11 Example, continued Auto enrollment gets people into the system The incentive makes saving more rewarding The information equips people to deal with the account balances they generate, thus enhancing the value of the incentive.

12. 12 Conclusion Incentives as just one component of saving policy –Redesign the incentives –Couple with intelligent defaults and information Would leverage the benefits and reduce the costs of incentives

13. 13 One more thing The US currently spends $200 billion per year on saving preferences. Could we use 1 percent of that to design experiments to see which combinations of defaults, information, and incentives work best?