Mind the Gap: The Effectiveness of Incentives to boost Retirement Saving in Europe

Pension reforms all across Europe have a common theme: to reduce the generosity of the pay-as-you-go public pension pillar threatened by population aging, and to build up new pillars by private saving through occupational and individual pension plans. The extent of such retirement saving varies a great deal across Europe. This variation reflects, among other factors, the differences in public pension systems, taxation and capital market regulations. The first part of this paper looks at this variation in an attempt to learn about the effectiveness of the various incentives to boost retirement saving. While we find a strong correlation between the generosity of pay-as-you-go pensions and retirement saving, there is no straight correlation between the volume of retirement saving and the extent to which it is tax-favored. The second part of the paper uses the recent reforms in Germany as "experiments" that may shed light on which incentives might work and which might fail. We describe the introduction of the tax-favored "Riester pension plans" in 2001 and the 2004 tax reform, which changes the tax treatment of retirement savings in Germany from a conventional to a deferred taxation scheme. In spite of a deep subsidy and a generous tax treatment, "Riester pensions" have not found much attraction, while the originally heavily tax-favored whole life insurance is still wide spread. We conclude that boosting retirement saving requires more than simply tax relief.