Do Tax Incentives Increase 401(k) Retirement Saving?
Evidence from the Adoption of Catch-Up Contributions
Matthew S. Rutledge
April Yanyuan Wu
Francis Vitagliano
Discussant:
Patrick Purcell
Social Security Administration
“Catch-up” Contributions
• EGTRRA of 2001 allows “catch-up” contributions:
Maximum 401(k) contribution in 2015 is $18,000.
Workers 50 and older can contribute an additional
$6,000.
Rationale: People may not have saved enough for
retirement when they were younger. They may
need to save more as retirement approaches.
“Catch-up” Contributions
• The tax-deferred treatment of 401(k)-type plans
cost the U.S. Treasury $61 billion in forgone
revenue in 2014. (Joint Committee on Taxation)
• However . . . .
• “. . . researchers have not come to a consensus on
whether this tax expenditure induces additional
retirement saving.”
“Catch-up” Contributions
• Do 401(k) contributions increase saving?
Poterba, Venti, and Wise (1995): 401(k) plans
generate an increase in net retirement saving.
Engen, Gale, and Scholz (1994): 401(k) savers shift
saving to tax-deferred plans. They don’t save more.
Engelhardt (2001): Very little of the average dollar of
401(k) wealth appears to be new household saving.
Chetty et al. (2014): Tax expenditures do not increase
total saving. Savers shift assets across savings plans.
“Catch-up” Contributions
• This study: Workers age 50 and over who had
made the maximum deferral increased their
annual contribution by $543 more than similar
workers just under age 50.
• However, “whether the increase in 401(k)
contributions is a substitution from other
accounts or an increase in total saving remains
unclear.”
“Catch-up” Contributions
• The “catch-up” provision appears to have resulted
in higher 401(k) contributions by the targeted
population.
• However, we do not know if these contributions
are new saving or if the same amount would have
been saved anyway.
• Should we use tax-expenditures to increase
401(k) contributions by people already
contributing the maximum when most people
contribute much less – or nothing at all?
“Catch-up” Contributions
• Only about 9 percent of individuals in the sample
had made 401(k) contributions within 10 percent
of the annual maximum.
• Those had who contributed within 10 percent of
the maximum differed from the full sample:
Maximum contributors earned about $163,000
compared to $57,000 for the full sample.
Maximum contributors had mean net worth of
$439,000, versus $200,000, for the full sample.
“Catch-up” contributions
• The catch-up provision might not be necessary as
an incentive for older workers to save more.
• Workers over 50 tend to save more than younger
workers, regardless of tax incentives.
• “Empirical evidence suggests that saving rates
increased around age 50 between 0.5 and 1.2
percentage points, even before the adoption of
catch-up contributions.”
“Catch-up” contributions
• Because the tax incentives for retirement saving
rise in value with income (and marginal tax rate)
they are sometimes said to be “upside down”.
• Catch-up contributions apply to people who
already save more than average: workers who
contribute near the maximum and are over 50.
• From the perspective of younger, lower-earning
workers, the catch-up provision might appear to
be both upside down and backwards.
“Catch-up” contributions
• Lower-income households are less sensitive to tax
incentives.
• They face lower tax rates, and many have no income
tax liability after deductions and exemptions.
• “Instead, more direct policy interventions, such as
auto-enrollment tied to auto-escalation, are likely
necessary to increase retirement saving for this
group.”
“Catch-up” contributions
• Another policy option would be to make the
“Savers Credit” a refundable tax credit.
• This credit is worth up to one-half of the first
$2,000 contributed to a 401(k) or an IRA.
• In 2012, 6.9 million tax filers claimed credits
totaling $1.2 billion. The average credit was $215
for joint filers and $127 for single filers.
• Families who have no federal income tax liability
might respond to a refundable tax credit.
“Catch-up” contributions
• Main take-away messages:
• “The increase in 401(k) contributions for the 10
percent who are previously constrained may or may
not have resulted in an increase in net retirement
saving.”
• “If it did, further research would be needed to
understand whether this increase is sufficient to
counteract the additional deadweight loss from the
increase in the 401(k) tax expenditure.”
Thank you.