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How to Make Americans Really Save

Ryan McVay | Stone | Getty Images

If you're still preparing your taxes, you know that available deductions often come and go. But there is one that's easy to find: the deduction for retirement savings in a 401(k) or IRA.

It's a nice deduction to be had, and its policy aim — to promote savings — is laudable. But is a tax deduction really the best way to induce people to save more? Put another way, is the government getting what it wants for all the money it's giving away?

Not necessarily, says a new report.

Researchers working with the Center for Retirement Research at Boston College have looked into the most effective, and cost-effective, way for a government to promote savings — and according to their findings, tax subsidies aren't it.

(Read more: CNBC Explains: Tax Deductions)

The team studied retirement-saving policies in Denmark, where the plans offered are quite similar to the 401(k)'s, IRAs, and employer pensions available in the U.S. They found that automatic saving plans — either government requirements to put away a certain percentage of income, or automatic pension contributions — "could increase household saving much more, at a much lower cost to the government."

The key, they say, is in how people behave toward saving. They argue that most savers are not active savers: most people won't actively choose to increase their savings, but they will save if, say, a company plan presumes a certain contribution unless the person changes it.

"We're finding that if you want to increase savings, you have to use passive policies, not active which rely on you going out and doing something," says John Friedman, an assistant professor of public policy at Harvard's John F. Kennedy School of Government and a co-author of the study. "If I force you to save more" or if a company's retirement plan has an automatic minimum contribution unless employers choose otherwise, "the fact that you are not paying attention is what will actually make you save more."

How common is this phenomenon? When a tax incentive like the deduction for 401(k) contributions is available, "only about 15 percent of people are responding" to it, he says. "The other 85 percent of people are just doing whatever it is they would have done before."

The effect of passive, or default, options, isn't limited to retirement savings. For example, in countries where people are presumed to consent to organ donation, and have to opt out if they don't want to consent, one extensive study shows that donation rates are 25 to 30 percent higher than in countries where people have to choose to be donors.

There are more problems with the retirement-savings tax break, not least the fact that the 15 percent of people who really take advantage of it are those least in need, according to the Center for Retirement Research study. "The people who are more aware of what's going on with these policies," and thus more likely to use tax-advantaged savings, "are people who are wealthier have more education, and are older," Friedman says. "The whole point of these savings policies is that some people aren't saving enough, so you want to target them to people who aren't wealthy. But in practice, you're targeting the policy at people who are already saving enough."

A paper on retirement savings published by the AARP's Public Policy Institute drew similar conclusions. Current tax incentives, it found, "merely subsidize shifting saving for high-income households rather than raising the total amount of saving in the economy."

Then there is the matter of cost. Friedman estimates that the federal government spends $125 billion per year subsidizing people who make 401(k) contributions. If that subsidy were reduced or eliminated, he says, "you'd be able to save the government a lot of money without actually changing how much people are saving overall."

What would work, Friedman says, is not complicated — but it's a significant change. "Our data suggest that an automatic contribution policy, or default, would be much more effective. It would cost the government a little bit to get firms to do it, but nowhere near as much" as the government spends now on tax incentives — "and you would get a much, much bigger bang for your buck."

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