Do Tax Deferred Accounts Improve Lifecycle Savings? Experimental Evidence

Abstract

Tax deferred accounts (TDAs) are an increasingly popular method of saving for retirement, and have become common across many developed countries. Nevertheless, it is unclear whether TDAs actually improve a household s lifecycle savings behavior and retirement preparedness because it is difficult to perform a counterfactual analysis. Households always have other means of savings so there is no guarantee that a TDA, with its inflexible restriction that funds cannot be drawn until retirement, will be attractive or improve lifecycle savings. In this paper we resort to laboratory experiments to address the question of whether TDAs improve lifecycle savings by comparing experimental treatments where subjects have access to TDAs with treatments where they do not, and we are also careful to consider the tax consequences of our different treatments as well. We find that the presence of TDAs substantially improves a household s lifecycle savings behavior, making them better prepared for retirement.