In many countries, the demographic transition has prompted pension system reforms. These reforms are making individuals increasingly responsible for their own retirement preparedness, amidst evidence that many lack basic financial knowledge and often make poor decisions when saving for retirement. In this pension landscape, retirement saving decisions are increasingly mediated by financial technologies.
In a recent paper, Claudio Daminato and his coauthors explore whether and how financial technology can affect retirement saving behavior. The paper examines how a digital pension application affects individuals’ voluntary contributions to their retirement accounts in the context of Swiss occupational pension plans, where these contributions benefit from substantial tax incentives. The app is linked to an individual retirement savings account and provides users with detailed information regarding their occupational pension plan. Notably, the app allows individuals to compute the tax savings they can achieve through contributing to the retirement account. Furthermore, the individual can use the app to make a voluntary contribution directly, greatly simplifying the contribution process.
Using administrative pension fund data, the study documents that, prior to the introduction of the app, only around 3% of pension plan participants made additional voluntary contributions to their pension plan on top of the mandatory part.
Leveraging a unique natural experiment in which members of different pension funds gained access to the same app in different years, the authors show that introducing the app increases the probability of making a voluntary retirement contribution by around 60%. The results also reveal that male, higher-income earners responded the most.
Additionally, the authors conducted a field experiment randomizing different reminders to use the app, each emphasizing a different feature of the digital tool. The sample of non-users was randomly assigned into a control group, who did not receive a reminder invitation letter, and three treatment groups: (1) those who received a reminder with basic information about the app content; (2) those who received a reminder with an additional nudge toward the digital app’s ability to compute the tax savings from contributions; and (3) those who received a reminder with an additional nudge toward the digital app’s ability to reduce the “hassle” costs of making a contribution. The set of experimental results provide compelling evidence that the app affects contribution behavior mainly through reducing the “hassle” costs of making contributions, rather than by providing information about the associated tax savings.
The study findings are relevant to the ongoing digitalization of the retirement sector and inform the design of future FinTech tools in support of retirement savings, particularly regarding the importance of simplifying the process of making a transaction. They also inform the specification of models of savings and portfolio choice, emphasizing the importance of incorporating transaction or fixed participation costs.
Digitalization and Retirement Contribution Behavior: Evidence from Administrative Data (paper in The Review of Financial Studies, Vol. 37, no. 8, August 2024)