The Effect of the Employer Match and Defaults on Federal Workers’ Savings Behavior in the Thrift Savings Plan: Working Paper 2019-06
This paper develops an empirical model to forecast the effects on employee contribution rates and on employer costs if the federal government changed the employer match or the default contribution rate for participants in the Thrift Savings Plan.
Policymakers are weighing options that would change the retirement system for federal workers by shifting more of their deferred compensation from the defined benefit plan toward the defined contribution plan, called the Thrift Savings Plan (TSP). We use administrative longitudinal data on federal workers’ demographics, compensation, and TSP behavior to estimate the effects of an employer match and plan default options on workers’ TSP savings behavior and the cost of employer contributions. We rely primarily on two sources of exogenous variation stemming from policy changes to the TSP: the availability of an employer match for workers hired after 1983 and the introduction of automatic enrollment for workers hired after July 2010. Further, we develop a discrete choice model that can predict how simultaneous changes in the default rate and matching structure affect contributions. That empirical model is flexible enough to accommodate behavior rooted in both neoclassical models and theories from behavioral economics. The neoclassical specification indicates that the match has little effect on employee contributions. But a specification based on psychological anchoring fits the data better and shows that a match can affect employee contributions far more than a default contribution rate. We find that raising the matching threshold from zero percent to 5 percent leads to employees contributing 3.3 percent more of their salaries to TSP. In contrast, an increase in the default contribution rate from zero percent to 3 percent increases employee contributions by 0.3 percent of their salary.