Do Catch-Up Contributions
Increase 401(k) Saving?
Matthew S. Rutledge
Research Economist
Center for Retirement Research at Boston College
17th Annual Joint Meeting of the Retirement Research Consortium
August 6-7, 2015
Washington, DC
Saving is heavily subsidized in U.S.
• Traditional 401(k) and IRA contributions: Pre-tax.
o But subject to payroll tax (short run).
o Taxed at withdrawal (long run).
 Hence, “401(k) deferrals.”
o Tax expenditure on 401(k)s of $62.3 billion in 2015.
• Unclear if 401(k)s increase retirement saving.
o Poterba, Venti, Wise (1995): Higher net saving.
o Engen, Gale, Scholz (1994): Just reallocation.
o Chetty et al. (2014): Most people (Danes) are “passive.”
 Even active savers mostly just reallocate.
1
How can we evaluate 401(k) saving?
• National roll-out in 1980, so not a great natural experiment.
o Some variation at industry or geographic level, but
participants may differ in other ways.
o Some variation in tax incentive by tax bracket, but only
for marginal dollar of saving, and big dataset required.
• Source of variation: Catch-up contributions.
o Starting in 2002, age 50+ have higher 401(k) limit.
 2015: $18,000 for age < 50, $24,000 for age 50+.
o Previously-constrained have new tax incentive for saving.
 Important: Not everyone can afford it.
2
This paper
• Joint with April Yanyuan Wu, Francis Vitagliano.
• How sensitive are high savers to 401(k) tax incentives?
• Did 401(k) contributions increase due to the catch-up
contribution provision?
o Triple-differences framework around catch-up adoption.
o Uses Survey of Income and Program Participation (SIPP)
data linked to tax records.
3
401(k) limits rose above and below age 50.
401(k) Deferral Limits by Age
Year
1999
2000
2001
2002
2003
2004
2005
Nominal limit Catch-up limit
$10,000
10,500
10,500
11,000
12,000
13,000
14,000
$0
0
0
1,000
2,000
3,000
4,000
Real (2005$) limit
Age < 50
Age ≥ 50
$11,723
$11,723
11,909
11,909
11,579
11,579
11,942
13,027
12,737
14,860
13,440
16,542
14,000
18,000
Real YoY increase
Age < 50 Age ≥ 50
-2.2 %
-2.2 %
1.6
1.6
-2.8
-2.8
3.1
12.5
6.7
14.1
5.5
11.3
4.2
8.8
Source: Authors’ calculations from the Internal Revenue Service.
4
Our contribution
• First causal analysis of catch-up contributions on 401(k)
saving.
o Existing studies: Mostly descriptive.
• Uses admin data on 401(k) saving linked to household survey.
o More accurate than household survey alone.
o More info on demographics, economic circumstances
than in admin data alone.
• Uses natural experiment to examine responsiveness of savings
to tax incentives.
5
SIPP-SSA linked data
• SIPP 1990-2004 panels.
o Demographics, education, kids, net worth, occupation,
spouse’s work status, homeownership, region, pensions.
• Social Security Detailed Earnings Record, 1978-2006.
o Total earnings, deferred earnings.
o Accessed via the SIPP Synthetic Beta.
• Sample: Workers ages 46-53 sometime during 1999-2006.
o Exclude if earning less than 4 quarters of OASI coverage
or unable to work due to health condition.
6
Triple-differences model
𝑦𝑖𝑡
= 𝛼0 + 𝛼1 𝐶𝑈𝐶𝑡 + 𝛼2 𝐴𝑔𝑒50𝑖𝑡
𝛼13 𝐶𝑈𝐶𝑡 𝑀𝑎𝑥𝑖𝑡
+ 𝛼3 𝑀𝑎𝑥𝑖𝑡 + 𝛼12 𝐶𝑈𝐶𝑡 𝐴𝑔𝑒50
+ 𝑡 𝐴𝑔𝑒50𝑖𝑡 𝑀𝑎𝑥𝑖𝑡
𝛼123
𝑖𝑡 𝐶𝑈𝐶
+𝛼23 𝐴𝑔𝑒50𝑖𝑡 𝑀𝑎𝑥𝑖𝑡 +
+𝛾′𝑋𝑖𝑡 + 𝜏𝑡 + 𝜈𝑖𝑡
• y = total tax-deferred earnings, or contribution rate
(deferrals/earnings)
• CUC = 1 if catch-up contribution in effect (2002 or later)
• Max = 1 if ever contributed near 401(k) limit previously
7
Identification strategy
• Short window around 2002.
• Short window around age 50.
• Max contributors very dissimilar from non-max contributors.
• But max contributors pre-50 and post-50 are conditionally
identical except for catch-up contributions.
8
About 9 percent of sample ever contributes
near the tax-deferred limit.
Frequency Contributing Near the Maximum 401(k) Contribution
Share of years at ages 46-53 in 1990-2005
Never
Near max 1-5 years
Near max 6-7 years
Near max all 8 years
Number
205,920
10,614
4,789
4,621
Percent
91.1 %
4.7
2.1
2.0
Source: Authors’ calculations from the Survey of Income and Program Participation Completed Data Files, 1990-2005.
9
Max contributors: Greater earnings, net
worth, education
Summary Statistics for Full Sample and Participants Ever Near Maximum
Characteristic
Earnings
Net worth
Male
Married
Ever had children
Children ages 0-17
Children ages 18-24
Black
College degree or more
Homeowner
Blue collar
Number of observations
Full sample
$57,181
$199,571
52.6 %
72.9
80.6
40.2
24.5
9.2
32.8
80.5
30.5
156,423
Max contributors
$162,531
$438,849
70.2 %
82.0
74.1
32.3
20.6
3.2
72.1
91.5
34.8
12,406
Source: Authors’ calculations from the Survey of Income and Program Participation Completed Data Files, 1999-2005.
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Post-2002, deferrals among max contributors
grow faster after age 50.
Average Deferred Earnings by Age Among Workers Who Are Ever Near the Maximum
$18,000
$15,000
$12,000
$9,000
1999-2001
2002-2005
$6,000
$3,000
$0
46
47
48
49
50
51
52
53
Source: Authors’ calculations from the Survey of Income and Program Participation Completed Data Files, 1999-2005.
11
11
Catch-up-eligible max contributors deferred
$543 more than younger max contributors.
Triple-Differences Regression Results
Dependent variable
Mean of the dependent variable
Year ≥ 2002
Age 50+
Ever previously at 401(k) limit
(Age 50+) × (Year ≥ 2002)
(Age 50+) × (At limit)
(At limit) × (Year ≥ 2002)
(Age 50+) × (Year ≥ 2002) × (At limit)
Number of observations
Deferred amount
2705.9
248.5 ***
95.9 *
5604.6 ***
-11.4
-460.5 *
917.1 ***
543.3 *
86,830
Note: *** p<0.01, * p<0.10.
Source: Authors’ estimates from the Survey of Income and Program Participation Completed Data Files, 1999-2005.
12
12
Catch-up-eligible max contributors deferred
$543 more than younger max contributors.
Predicted Increase in 401(k) Contributions from 1999-2001 to 2002-2005, 2005 $
Max contributors over 50 $248
$917
$543
Max contributors under 50 $248
$917
$1,166
$1,697a
Non-max contributors over 50 $248 $237a
Non-max contributors under 50 $248 $248
$0
Year
Year × max
Year × age × max
$1,000
$2,000
a
For simplicity, the figure does not depict the impact of the (Year)(Age) interaction. This interaction reduces the predicted total increase in
contributions by $11 for each of the two groups that include individuals age 50 and over.
Source: Authors’ estimates from the Survey of Income and Program Participation Completed Data Files (1999-2005).
13
Calculating the elasticity
• $543 is 4.6 percent of average real 401(k) limit for age-50plus.
• On average, real 401(k) limit is 33 percent higher post-2002
for 50-plus, and 11 percent higher post-2002 for age < 50.
 22-percentage-point relative increase for 50-plus
•
Elasticity of 401(k) deferrals with respect to change in the
maximum deferral is 4.6/22 = 0.21.
•
Alternative specifications:
o Individual ages: $898 extra, elasticity = 0.30
o Fixed effects: $1,020 extra, elasticity = 0.40
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Summary
• Higher catch-up limit provides a source of variation to test
sensitivity of 401(k) deferrals to tax incentives.
• Max contributors age 50-plus defer an additional $540-$1,020
more than max contributors slightly younger than 50.
• The implied elasticity of 401(k) saving with respect to taxdeferred limit is 0.21-0.40.
15
Conclusion
• High-contributing 401(k) participants are sensitive to tax
incentives to save.
• The study does not address whether:
o
Overall retirement saving is higher, or if the extra deferrals
are simply reallocated from post-tax saving vehicles.
o
Participants contributing substantially less are as sensitive
to tax incentives to save.
16