Responses to tax subsidies on contributions to private retirement savings

As the population ages, governments are using tax incentives to boost private retirement savings, but such incentives may harm public finances if they have little impact on net savings. We shed light on this tradeoff in the context of contributions to individual retirement accounts, exploiting large and abrupt changes in limits on tax-preferred contributions in Australia. Using tax-register data, we show that higher limits increase the retirement contributions of high earners. However, as around two-thirds of this response is financed by positive income responses, with little crowding out of other savings, there is no significant cost to public finances.