Effects of Tax-Based Saving Incentives on Contribution Behavior: Lessons from the Introduction of the Riester Scheme in Germany

This paper analyzes the effects of tax-based saving incentives on contribution behavior in Germany (Riester Pension). Using tax reform and inflation, the effect of the tax price on the decision of whether or not to contribute is analyzed. Our central estimate implies a local average elasticity of the contribution decision of -2.36. In addition, using shifts in price kinks over time, we show graphical evidence of the decision on how much to contribute. Our results show that taxpayers adjust their savings immediately if the subsidized amount increases. Consequently, the government has control over the contribution behavior on both margins by setting tax-based saving incentives.