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 (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.