Non-Take-Up of Tax-Favored Savings Plans: Evidence from Dutch Employees

S. Hochguertel, R.J.M. Alessie, A. van Soest

Research output: Contribution to JournalArticleAcademic

Abstract

Since the early 1990s, the Dutch tax system allows for a tax-favored form of risk-free savings through employer-sponsored savings plans (ESSPs). Under some conditions and up to a certain amount, the contributions to this plan are tax-deductible, and the returns as well as the withdrawals are tax-free. This makes these plans extremely attractive, with real after-tax returns by far exceeding the returns to other financial assets such as risk-free saving accounts or stocks and bonds. According to standard economic theory, those who have access to this type of savings should participate in them and hold the maximum tax-favored amount, provided they have enough financial wealth that they can allocate to their own choice. In this paper, we analyze data on participation and amounts held in ESSPs for employees who have access to the asset, investigating the relationship with background characteristics and other forms of savings. We find that people who are likely to face binding liquidity constraints less often buy ESSPs and, if they buy them, more often use them as a substitute for other savings. The results also provide evidence of financial decision-making that is not driven by standard economic arguments, confirming theoretical and empirical findings in the recent behavioral and psychological literature on savings. © 2006 Elsevier B.V. All rights reserved.
Original languageEnglish
Pages (from-to)483-501
Number of pages19
JournalJournal of Economic Psychology
Volume27
Issue number4
DOIs
Publication statusPublished - 2006

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Taxes
taxes
savings
Deductibles and Coinsurance
Economics
employee
evidence
Decision Making
Psychology
employer
assets
deductible
tax system
Tax
Savings
Employees
liquidity
economic theory
withdrawal
decision making

Cite this

Hochguertel, S. ; Alessie, R.J.M. ; van Soest, A. / Non-Take-Up of Tax-Favored Savings Plans: Evidence from Dutch Employees. In: Journal of Economic Psychology. 2006 ; Vol. 27, No. 4. pp. 483-501.
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Non-Take-Up of Tax-Favored Savings Plans: Evidence from Dutch Employees. / Hochguertel, S.; Alessie, R.J.M.; van Soest, A.

In: Journal of Economic Psychology, Vol. 27, No. 4, 2006, p. 483-501.

Research output: Contribution to JournalArticleAcademic

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AU - van Soest, A.

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AB - Since the early 1990s, the Dutch tax system allows for a tax-favored form of risk-free savings through employer-sponsored savings plans (ESSPs). Under some conditions and up to a certain amount, the contributions to this plan are tax-deductible, and the returns as well as the withdrawals are tax-free. This makes these plans extremely attractive, with real after-tax returns by far exceeding the returns to other financial assets such as risk-free saving accounts or stocks and bonds. According to standard economic theory, those who have access to this type of savings should participate in them and hold the maximum tax-favored amount, provided they have enough financial wealth that they can allocate to their own choice. In this paper, we analyze data on participation and amounts held in ESSPs for employees who have access to the asset, investigating the relationship with background characteristics and other forms of savings. We find that people who are likely to face binding liquidity constraints less often buy ESSPs and, if they buy them, more often use them as a substitute for other savings. The results also provide evidence of financial decision-making that is not driven by standard economic arguments, confirming theoretical and empirical findings in the recent behavioral and psychological literature on savings. © 2006 Elsevier B.V. All rights reserved.

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