A large literature in behavioural economics finds that households benefit from assistance with the challenging task of preparing financially for retirement. Workplace pension program characteristics such as default options or savings rate escalators tend to significantly increase contributions to these plans (Madrian and Shea 2001; Choi et al. 2004; Thaler and Benartzi 2004). Recent evidence also suggests that automatic contributions pass through into greater private wealth accumulation even after controlling for possible crowd-out responses in other forms of saving (Gelber 2011; Chetty et al. 2014). These programs are sometimes viewed as effective ways of increasing savings for those who underprepare for retirement, while still allowing active savers to opt out of such arrangements if desired (Thaler and Sunstein 2008; Iwry and John 2009).
However, the effect of workplace pensions on total private savings is still an empirically controversial question. Most of the work on this question analyzes the rapid expansion of 401(k) plans in the United States. Some studies find that workplace pensions do not influence or may even crowd in private wealth accumulation (Poterba, Venti and Wise 1994, 1995; Gelber 2011), whereas others find large displacement effects (Benjamin 2003; Engelhardt and Kumar 2011). The conflicting results may be driven by identification problems that beset this literature (Bernheim 2002) or by different behavioural responses to the types of variation that these studies exploit empirically (noted by Chetty et al. ).
This paper investigates whether an automatic change in registered pension plan (RPP) contributions leads to higher total savings or simply induces a crowd-out response in registered retirement savings plans (RRSP). To control for the possibility that individuals’ contributions across savings accounts are correlated due to unobserved preferences for saving, the analysis exploits a unique feature of RPPs: firms often integrate their contribution formulas with the contribution schedule of the Canada Pension Plan (CPP) or Québec Pension Plan (QPP). That is, many plans (80% to 85%) have lower marginal contribution rates for income levels that are charged more heavily by the CPP or QPP, and vice versa. This occurs because firms realize the additional costs imposed on them by the public pension and commensurately reduce their payments to RPPs (Frenken 1996). As a result, workers’ savings in RPPs change at the earnings threshold associated with a change in the CPP or QPP contribution rate through no control of their own. Using regression techniques, the effect of this savings rate change on RPP contributions is estimated, as is the resulting displacement effect on RRSPs. Therefore, this paper offers new insight into the role of RPPs in helping households save for retirement, while improving upon some of the methodological issues prevalent in related studies.
The results show that RRSP contributions decrease by approximately $0.50 per $1.00 increase in RPPs, for workers with: (1) strictly positive savings in both accounts; and (2) total tax-deductible savings strictly below their RRSP contribution limits. On balance, some behavioural substitution is occurring between the two plans, but there may still be a role for employer-assisted saving given that one-half of the automatic change in pension wealth passes through into greater total savings. Moreover, the response tends to be smaller for workers with weaker histories of saving in retirement accounts. Employer sponsorship and other forms of automatic saving may, therefore, matter a great deal in helping more vulnerable groups save for their retirement.