Do tax incentives for saving in pension accounts cause debt accumulation? Evidence from Danish register data

Measuring the effect of an unanticipated reduction in tax credits on pension savings, this paper shows that individuals tend to make extraordinary repayments on their debt when saving in retirement accounts becomes less attractive. We conclude that tax-favoured retirement accounts could affect gross debt accumulation. In line with recent studies, we show that tax subsidies for saving in pension accounts only affect total individual savings to a limited extent, but unlike prior research this paper distinguishes between the effects on financial assets and liabilities. As a particular feature, we have gained access to comprehensive information on all mortgage loans in Denmark. Exploiting the exogenous shock to pension taxation, we demonstrate how a sharp reduction in voluntary pension savings is partly offset by increased repayments on mortgage loans.