Does Tax Deductibility Increase Retirement Saving? Lessons from a French Natural Experiment

This paper presents new evidence on how employees respond to tax incentives for retirement saving. Using administrative data from a large retirement plan administrator in France, we examine the voluntary saving choices of approximately 1.4 million workers before and after the implementation of the 2019 Loi Pacte, a reform that introduced tax-deductible voluntary contributions into employer-sponsored retirement plans. One of the features of this multi-part reform was a change in the provisions for voluntary individual contributions to employer-sponsored saving plans. Prior to the implementation of the Loi Pacte, voluntary contributions could only be made on a post-tax basis. Wage earnings, for example, would be taxed before a worker could make a contribution, so that the contribution was post-tax. The reform introduced the possibility of making pre-tax contributions. In this case, labor income could be contributed to the plan without any payment of tax. The tax liability on this income was deferred until the funds were withdrawn from the account, typically when the worker was retired. This postpones the tax payment, often by several decades, and, given the progressivity of income tax rates and the fact that the income of many retirees is lower than their income while working, can also result in a lower tax burden on the earned income. The net effect the Loi Pacte was therefore to increase the rate of return on saving through employer-sponsored plans. On a net-of-tax return basis, post-tax contributions often dominate pre-tax contributions. The reform increased contributions to retirement saving accounts, especially among higher-income, older workers and those who contributed to a voluntary saving plan on a post-tax basis before the pre-tax option became available. There was no decline in contributions to “medium term” saving plans, which are provided by employers and can be accessed after five years, suggesting little substitution between these accounts.