MANY developed countries are seeking new sources of tax revenue to balance their budgets today. They also face aging populations expecting long, comfortable retirements. A new paper from Harvard economists Raj Chetty and Steve Friedman, partnered with Danish researchers, may offer a solution.

Tax-advantaged savings accounts have become popular in developed economies as a way to promote saving for retirement. You can put pre-tax money into an account you can’t access (without a penalty) until you retire. It accrues while you work and then you pay taxes on the account, once you reach retirement. The hope is that the tax-deferral promotes retirement saving. But the new paper, using Danish tax data, finds that most people are passive savers: they don’t respond to tax incentives. The most effective way to encourage saving is to default people into contributing to retirement saving accounts, regardless of tax-treatment.

The policy implications of this paper raise some interesting questions. The authors note that America foregoes $100 billion in tax revenue a year because of the tax deduction. If it does not increase saving, is it worth the cost? Britain and the Netherlands are also rethinking their tax incentives and contribution limits. But economist Jeff Brown points out that the tax incentives apply to the employer and employee.  The tax-structure encourages employers to offer the accounts in the first place. Access to these plans does increase saving, especially for lower and middle income workers.

From a public finance perspective we should also be wary of the touted savings. Both the Chetty-Friedman paper and Ray Fisman cite the Joint Committee on Taxation as the source of the $100 billion in forgone revenue projection. It is calculated as the tax not collected when people contribute to their retirement account minus the revenue collected from current retirees drawing down their account today. That’s a loss to the government because private pension accounts are relatively new; current retirees have not had as much time to contribute to them.

But these accounts are not fully tax-exempt; rather, they are tax-deferred. The JCT estimate only includes revenue foregone today. It doesn’t count the tax that will be collected when a current worker retirees. The actual loss to the government depends on tax rates and income decades from now. It’s therefore hard to say how much revenue is lost with these accounts. If taxes are high enough in the future, taking into account the current low cost of borrowing, the government may come out ahead revenue-wise.

Making a grab for the revenue now is really just taking revenue from future tax-payers. Not counting uncertain revenue so far into the future may be a typical accounting convention, but in this case it should be considered when figuring inter-generational trade-offs.