Are Targeted Matching Schemes Effective in Stimulating Retirement Savings?

Layer 1: Overview

Governments across ten-plus countries — including Australia, the United States, Germany, and New Zealand — have introduced matching schemes to encourage low- and middle-income earners to contribute voluntarily to private pensions, motivated by the concern that progressive tax systems give these groups weaker incentives to save for retirement than high-income earners. Whether such schemes actually raise retirement savings is theoretically ambiguous: by reducing the cost of contributing they produce a substitution effect favoring more contributions, but the government payment also raises anticipated retirement income, reducing the desire to save further (a retirement income effect). The sign of the net effect depends on the distribution of contributions that would have occurred in the scheme’s absence, and it is especially unclear for those who would already have contributed above the matching ceiling.

This paper tests the full set of theoretical predictions from a two-period intertemporal savings model using Australia’s Superannuation Co-contribution Scheme as a clean natural experiment. The scheme matches personal after-tax superannuation contributions up to $1,000 per year at a single, flat matching rate that varied over time — 100% in 2003-04 and 2009-10 to 2011-12, 150% in 2004-05 to 2008-09, and 50% from 2012-13 onward — and eligibility is phased out smoothly with income (no sharp income discontinuity, unlike the US Saver’s Credit), removing incentives for income manipulation. The maximum co-contribution payment was accordingly $1,000, $1,500, or $500 depending on the period. Estimation uses the ATO Longitudinal Information Files (ALife), a 10% random sample of all registered Australian tax filers linked longitudinally since 1990-91, covering 1,416,622 individual-year observations from 1999-2000 to 2016-17. The authors employ a first-differenced estimator exploiting within-individual variation in eligibility and match rates across years, conditioning on income, income squared, demographic controls, and year fixed effects.

On the extensive margin, eligibility is associated with statistically significant but small increases in the probability of making any voluntary after-tax contribution: 0.6 percentage points at the 50% match rate, 0.9 percentage points at 100%, and 2.7 percentage points at 150%. Bunching at the salient $1,000 eligible maximum rises monotonically with the match rate: 0.23, 0.84, and 1.4 percentage points, respectively. Below $1,000, the probability of contributing in that range increases by 1.2, 1.6, and 2.7 percentage points — consistent with the substitution effect drawing in non-contributors and low contributors. Above $3,000, however, the probability of contributing falls significantly at all match rates: -0.66 pp (50%), -0.91 pp (100%), and -0.98 pp (150%), consistent with a retirement income windfall effect inducing high contributors to reduce their contributions toward the kink at $1,000.

These opposing forces mean that average personal after-tax contributions (intensive margin) fall under all match-rate regimes: by $24.0 (50%), $24.6 (100%), and $6.49 (150%) per person-year, all significant. The attenuation of the fall at the 150% rate is consistent with substitution effects beginning to overshoot the eligible maximum and partially offsetting the income effect. When the government co-contribution payment itself is included, the combined personal-plus-government contribution rises ($40 at 100%, $126 at 150%), but these gains are partly offset by crowding out of voluntary concessional (salary sacrifice, pre-tax) contributions: eligibility is associated with 1.1 percentage point and 0.8 percentage point reductions in the proportion making voluntary concessional contributions at the 50% and 100% match rates respectively.

Symmetry tests show no evidence of persistent habit formation: increases and decreases in treatment intensity produce contributions changes of roughly equal and opposite magnitudes on the extensive margin (gains +1.3 pp, losses -1.4 pp), ruling out the hypothesis that temporary eligibility establishes lasting savings behavior.

Heterogeneity analysis reveals that the small average response reflects constrained liquidity. The response is largest for partnered females (+2.7 pp on the extensive margin), who have more discretionary income as secondary earners, and for those in the top permanent-income quintile (+3.6 pp), compared with bottom quintile (+0.4 pp) and second quintile (+0.7 pp). Responses increase with age and with lagged superannuation balance, with those holding balances above $100,000 responding at around 2.5 pp versus only 0.6 pp for those with balances below $25,000. There is no evidence that information is the binding constraint: respondents who use a tax consultant respond no more than those who self-file, and survey data document approximately 80% scheme awareness among superannuants.

The paper’s central policy conclusion is that even a simple, transparent, and generous co-contribution scheme fails to meaningfully raise contributions of those it targets. The negative intensive margin arises because the scheme acts as a windfall for existing high contributors rather than newly inducing saving. These findings raise doubts about analogous reforms under discussion for the US Saver’s Credit.

Layer 2: Deep Dive

What is the identification strategy and what are the key threats to it?

The primary estimator is a first-differenced OLS regression exploiting within-individual, year-on-year changes in co-contribution eligibility and match rates. Because the income thresholds shift over time and individuals’ income fluctuates, the same person can move in and out of eligibility or across match-rate regimes, providing 16 distinct combinations of year-on-year changes in treatment status that identify the three match-rate coefficients. The key identification assumption is that first-differenced treatment indicators are contemporaneously uncorrelated with first-differenced idiosyncratic shocks. The main threat is income endogeneity — treatment is inversely related to income, and unobserved preferences to save may correlate with income. The authors address this by differencing out individual fixed effects and including income and income-squared as controls. They also test whether income manipulation around thresholds is occurring (it is not, unlike the US Saver’s Credit): frequency distributions of income show no bunching at the eligibility thresholds. The only income bunching observed is at the top of the lowest tax bracket (~$37,000), unrelated to scheme thresholds. As a robustness check, the authors also estimate individual fixed-effects models; results are broadly consistent, except for a theoretically inconsistent anomaly on the extensive margin for the 50% rate in the fixed-effects version, which the authors attribute to that model’s stricter exogeneity assumption being more likely violated in a life-cycle context.

How does the paper decompose income and substitution effects, and what is the empirical test for each?

The paper uses a two-period intertemporal model to show that the scheme creates a kinked budget constraint at the maximum eligible contribution (pmax). Those who would have contributed below pmax in the absence of the scheme face a lower cost of saving (substitution effect) and may increase contributions up to pmax. Those who would have contributed above pmax receive the co-contribution as a pure retirement income windfall, face no substitution incentive (the matching rate applies only below pmax), and respond only via a negative income effect by reducing contributions toward pmax. The empirical decomposition tests these predictions by estimating contribution probabilities in three ranges: contributions up to $1,000 (captures substitution effect), contributions between $1,001 and $3,000 (theoretically ambiguous — outflow from above $3,000 may offset inflow to $1,000), and contributions above $3,000 (captures negative income effect, as this range sits entirely above pmax). In Figure 5, the paper plots cumulative distribution function effects for each match rate across $100 increments from $0 to $10,000, showing negative effects on the CDF below $1,000 (substitution draws people above zero) and positive effects at and above $1,000 (income effect shifts mass below the maximum). The sign pattern is consistent with theory across all three match rates, and is more pronounced at higher match rates.

What does the paper find about bunching at the $1,000 maximum eligible contribution?

Eligibility is associated with significantly increased probability of contributing exactly $1,000, rising with the match rate: 0.23 pp at 50%, 0.84 pp at 100%, and 1.4 pp at 150%. The alternative specification distinguishing full eligibility (income below lower threshold, pmax = $1,000) from part eligibility (income in the tapered zone, pmax < $1,000) shows that part-eligible individuals also bunch significantly at $1,000 despite being entitled to match payments only for contributions below $1,000. This highlights the salience of the nominal maximum — people in the tapered zone treat $1,000 as the focal contribution amount rather than computing their individual optimal eligible contribution. The ATO online calculator does not report the maximum eligible contribution for part-eligible individuals, which likely reinforces this behavioral pattern.

What are the crowding-out effects on unmatched (concessional) contributions?

The co-contribution scheme is associated with reductions in the use of voluntary concessional contributions (salary sacrifice, which are pre-tax and thus ineligible for matching). Using data from 2009-10 to 2016-17 (when salary sacrifice can be separated from compulsory employer contributions), the authors find that eligibility reduces the proportion of people making voluntary concessional contributions by 1.1 pp at the 50% match rate and 0.8 pp at the 100% match rate (both statistically significant). The data do not allow estimation at the 150% match rate because salary sacrifice records are unavailable before 2010. This crowding out compounds the scheme’s limited impact on total retirement savings: the net addition to retirement income from voluntary contributions is even smaller than the after-tax contribution estimates suggest. The mechanism attributed is the income windfall effect — for those who already made after-tax contributions in the absence of the scheme, the matching payment reduces their need for additional voluntary pre-tax saving.

Is there evidence of asymmetry in scheme effects — do people who gain eligibility respond differently from those who lose it?

The symmetry test in Equation (6) separates increases in treatment intensity (becoming eligible or moving to a higher match rate) from decreases (losing eligibility or moving to a lower rate). On the extensive margin, the effects are approximately symmetric: gaining intensity raises the contribution rate by 1.3 pp on average, while losing intensity reduces it by 1.4 pp. This rules out the ’early targeting’ hypothesis that short-term scheme exposure establishes lasting contribution habits that persist after eligibility ends. There is, however, some distributional asymmetry: bunching at $1,000 and the negative income effect above $3,000 are weaker in response to decreases in treatment intensity than to increases, suggesting some stickiness — people whose treatment falls may sustain slightly higher contributions for a period because prior co-contributions made them feel wealthier. But on the intensive margin, the reduction in average contributions is significant when treatment increases and statistically indistinguishable from zero when treatment decreases. The overall conclusion is no meaningful asymmetry that would justify life-cycle ‘seeding’ arguments for young-age eligibility phased out later.

What heterogeneity in responses is documented, and what does it imply about who benefits?

Responses are largest among groups with greater discretionary income relative to their current consumption needs. Partnered females respond at 2.7 pp on the extensive margin (versus 1.2 pp for partnered males, 1.1 pp for single females, and 0.6 pp for single males). The interpretation is that partnered females are more likely to be secondary earners whose income is discretionary, reducing the liquidity cost of foregoing current consumption. The extensive margin response increases monotonically with permanent income quintile: 0.4 pp (bottom), 0.7 pp (2nd), 1.3 pp (3rd), 1.8 pp (4th), and 3.6 pp (top). Those in the top quintile are eligible only when their transitory income is temporarily low, and they appear to have both the liquid assets and the foresight to exploit the scheme. Responses increase with age, consistent with older workers facing lower liquidity constraints and having stronger retirement income motives. Lagged superannuation balance matters: those with balances above $100,000 respond at ~2.5 pp versus ~0.6 pp for those with balances below $25,000 — the scheme does not help low-balance individuals catch up. Importantly, there is no evidence that scheme uptake is constrained by information: tax-agent filers and self-filers respond at similar rates (~1.3 pp vs ~1.9 pp), and external surveys show roughly 80% public awareness. This rules out information provision as a policy lever likely to substantially raise the scheme’s impact.

How does this study relate to and differ from prior evaluations of the US Saver’s Credit and German Riester schemes?

Prior work on the Saver’s Credit (Duflo et al. 2007, Ramnath 2013, Heim and Lurie 2014) found small or null effects, attributed mainly to the scheme’s complexity — non-refundable tax credit with match rates of 11%, 25%, or 100% depending on income thresholds that create sharp discontinuities and strong income manipulation incentives. The Riester scheme (Corneo et al. 2009, 2010) showed zero effects on total savings, attributed to its complex co-contribution formula where the effective match rate depends on income and number of children, making the true incentive opaque. This paper’s contribution is to evaluate a scheme explicitly designed to avoid those complexities: a single flat match rate, co-contribution paid directly to the pension account, eligibility smoothly phased out with no discontinuities, and near-universal institutional coverage through mandatory superannuation. This design is analogous to the Duflo et al. (2006) H&R Block field experiment (which found 5–11 pp increases in contribution rates for 20–50% match rates), and the paper can be read as asking whether those larger field-experiment effects generalize to a national, ongoing program at comparable design simplicity. The answer is no: the national scheme produces responses an order of magnitude smaller than the field experiment. The paper attributes this partly to the field experiment’s ‘one-time-only’ nature (creating urgency), potential interaction with Saver’s Credit tax refunds, and selection of H&R Block clients. The Australian study also goes beyond prior work by estimating distributional effects (contribution ranges), crowding out of unmatched contributions, and symmetry tests — none of which were examined in the prior national scheme evaluations.

What are the paper’s policy implications and their scope conditions?

The primary implication is that co-contribution matching schemes, even when simple, generous, and widely known, are likely to produce small effects on retirement savings of low- and middle-income earners. The mechanism is that many in the eligible population already contributed more than the scheme maximum and treat the matching payment as a windfall, reducing personal contributions. The scheme is particularly ineffective for the lowest permanent-income earners, who face binding liquidity constraints and respond least even when they are aware of the scheme. This is directly relevant to proposed US reforms of the Saver’s Credit (the Retirement Security and Savings Act considered by Congress at time of writing) that would convert it to a direct co-contribution more like Australia’s scheme — the paper’s results suggest such simplification may not yield large savings increases. A scope condition concerns institutional context: Australia has near-universal mandatory superannuation with employer contributions at 9.5% of earnings, which may reduce the marginal value of voluntary contributions. The authors acknowledge that responses might be higher in countries without mandatory employer coverage, though the finding that lower-balance individuals respond least makes this qualification weak. A second scope condition is that the scheme excludes compulsory employer contributions from the matching base, so the results speak specifically to voluntary behavior. Future research is identified on whether tightening access to public pensions (raising the pension access age) would increase voluntary contributions among low-income earners who currently rely on public pensions as their retirement backstop.

What robustness checks are conducted?

The authors report four main robustness exercises. First, they estimate an individual fixed-effects model alongside the first-differenced model; results are broadly consistent, with the noted exception of a theoretically inconsistent anomaly at the 50% match rate for the extensive margin in the fixed-effects version, attributed to violation of the strict exogeneity assumption. This validates the first-differenced approach as the preferred specification. Second, they extend the base model to distinguish full eligibility (income at or below the lower threshold, pmax = $1,000) from part eligibility (income in the tapered zone, pmax < $1,000), confirming that even partial eligibility generates bunching at the salient $1,000 level. Third, they examine distributional predictions by estimating the model for 100 incremental contribution thresholds from $0 to $10,000 (Figure 5), verifying that the CDF-effect pattern is consistent with the theoretical predictions across all three match rates. Fourth, information access is tested by interacting scheme response with whether a tax agent was used to lodge the return; the absence of any significant difference between tax-agent filers and self-filers, combined with documented high public awareness, eliminates information deficiency as an explanation for the small response.

Key Concepts

Co-contribution matching scheme: A government program that pays a specified fraction (the matching rate) of the individual’s voluntary personal pension contributions up to a maximum eligible contribution ceiling, credited directly to the individual’s retirement account — as distinct from a tax credit that may not reach the account.

Retirement income effect (windfall effect): The tendency of matching payments to reduce voluntary personal contributions among those who would have contributed above the scheme maximum in the scheme’s absence: because the government contribution supplements their retirement income regardless of their own effort, they rationally reduce personal saving to the eligible maximum.

Substitution effect (in this scheme): The scheme’s reduction in the effective cost of contributing by raising the return to each dollar contributed, inducing those who previously contributed below the eligible maximum to increase contributions toward that maximum.

Bunching at the eligible maximum: Mass concentration of contributions at exactly $1,000 (the scheme’s nominal maximum eligible contribution), drawing both from below (via the substitution effect) and from above (via the income/windfall effect), and reinforced by the salience of the round-number maximum even for part-eligible individuals whose true eligible maximum is below $1,000.

Permanent income (in this context): The predicted value of long-run log total personal income estimated from a Mincer-style regression including individual fixed effects, used to distinguish individuals who are structurally low-income (and face genuine liquidity constraints) from those whose transitory income is temporarily low and who are high-permanent-income individuals exploiting the scheme.

Crowding out of concessional contributions: The reduction in voluntary pre-tax (salary sacrifice) superannuation contributions associated with scheme eligibility, reflecting the income windfall from the matching payment reducing the need for supplementary retirement saving through the pre-tax channel.

Symmetry of scheme effects: The property that the contribution response to gaining eligibility (or a higher match rate) is equal in magnitude and opposite in sign to the response to losing eligibility (or a lower match rate); symmetry implies no lasting habit formation from scheme exposure and rules out ’early targeting’ strategies aimed at establishing lifetime saving patterns.