Making Saving Incentives More Equitable

By :: July 8th, 2014

Tax expenditures for retirement saving top $100 billion annually—from 401(k)-type plans ($61.4 billion) to IRAs ($17.6 billion) to tax preferences for pensions ($35.1 billion)—but these subsidies disproportionately benefit higher-income households and do relatively little to improve the balance sheets of low- and moderate-income Americans. According to one study, the bottom 40 percent of households received just 3 percent of the tax benefits for saving in defined-contribution accounts such as 401(k)s.

This regressive distribution of benefits—combined with concerns about the incentives’ cost and efficacy—has led to calls for reform. President Obama would limit the tax saving from the deduction for retirement contributions to 28 percent of the amount contributed and impose age-based ceilings on the amount savers can accumulate in tax-deferred accounts. In a 2013 Hamilton Project paper, Karen Dynan proposed to combine a cap on benefits for retirement saving contributions with an expanded Saver’s Credit. And the Bowles-Simpson deficit reduction plan would tighten limits on contributions to qualified retirement saving plans.

To help better understand the distributional effects of these proposals, my colleagues Barbara Butrica, Pamela Perun, and Eugene Steuerle and I recently simulated the impacts of reforms to reduce the share of saving incentives that benefit upper-income households.  In one set of simulations, we found that reducing 401(k) contribution limits from the 2013 limit of $51,000 to the lesser of $20,000 or 20 percent of salary would only affect the lifetime taxes of 9 percent of households, and roughly two-thirds of affected households would be in top 40 percent of the income distribution.

We also looked at what would happen if Congress replaced the exclusion for retirement saving with a 25 percent refundable credit. This plan, which would be roughly revenue-neutral, would distribute saving benefits much more equally: the top 20 percent of taxpayers would see a decline in tax preferences while the bottom 80 percent would get a boost, on average. But it would have the downside of reducing lifetime saving for many high-income households and potentially lowering national saving.

The current system’s failure to encourage substantial saving by low- and middle-income workers makes it ripe for reform. Redesigning saving incentives to benefit workers across the income spectrum, instead of just those at the top, is a key step towards improved retirement security nationwide.


  1. AMTbuff  ::  12:54 pm on July 8th, 2014:

    Any reform of retirement savings incentives needs to treat defined contribution plans as if they were defined benefit plans: Limit the tax-deferred annual increase in present value to the same amount for both. Set that limit on a sliding scale according to age and then index the entire scale for inflation.

  2. AMTbuff  ::  1:30 pm on July 8th, 2014:

    correction: treat defined benefit plans as if they were defined contribution plans

  3. Peter Rudolph, CPA  ::  11:52 pm on July 8th, 2014:

    Seems like Mr. Harris wants have some wealth re-distribution. Most people know there are long-term tax advantages contributing to retirement.

    There are tax credits that help savers. The saver’s credit, helps the some of the 80% bottom people that earn less money. The income limits could be changed to expand the credit to get to the 80% number that Ben alluded to.

  4. Michael Bindner  ::  2:45 am on July 9th, 2014:

    I suspect higher income families will save regardless of whether they get a tax break or not – the break just keeps election contributions coming (although they would probably contribute anyway as well). We could kill two birds with one stone by flooring and capping the FICA employee contribution, making payments less for the rich and end taxes for the poor (allowing the end of the EITC and all its complicated procedures) while crediting the employer contribution equally to each worker and removing the cap – shifting to a VAT to strenghen the public system or a net busienss receipts tax (a VAT with deductions) if we want insured personal retirement accounts holding employer voting stock (with the insurance fund holding funds in all such companies). This would give Buffett and his secretary the exact same Social Security benefit (since I am sure her salary is fairly high) – although eventually this would ruin Buffett’s business model as employees take over their own companies. Of course, this is the Buffett model – buy a company, run it well. If workers can do this the need for separate savings goes away, as well as the opportunity to invest in other people’s labor.

  5. Michael Bindner  ::  2:46 am on July 9th, 2014:

    it was better the first way