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Tax Topics

2009 Tax Stimulus
2012 Election Tax Plans
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Alternative Minimum Tax (AMT)
American Jobs Act of 2011
Brief Description of the Model 2013
Current-Law Distribution of Taxes
Deficit Reduction Proposals
Distribution of the 2001 - 2008 Tax Cuts
Economic Stimulus
Education Tax Incentives
Estate and Gift Taxes
Expiration of the Bush Tax Cuts
Explanation of Income Measures 2013
Federal Budget
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Flow-Through-Enterprises
Guide to TPC Tables
Health Insurance Tax Incentives
Homeownership
How to Interpret Distribution Tables 2013
Marriage Penalties
Model FAQ 2013
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Presidential Transition - 2009
Recent Tax Stimulus Legislation
Retirement Saving
Tax Encyclopedia Index
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Value-Added Tax (VAT)
Who Doesn't Pay Federal Taxes?
Working Families

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Pensions and Retirement Savings

undefinedRoughly half of all workers participated in one or more retirement plans in 2003. 401(k) plans were most common, used by three-fifths of those participating in any plan. One-third of workers in any plan had traditional pension plans funded by their employers. Less than one-fifth of participating workers saved in individual retirement accounts (IRAs); they split about evenly between traditional deductible IRAs and Roth IRAs.
Source: Utilization of Tax Incentives for Retirement Saving

Defined contribution plans, which are essentially retirement savings accounts, have replaced defined benefit plans as the most common form of retirement saving. That change has shifted responsibility for accumulating retirement funds from employers to workers and raised concerns that workers may not save enough on their own. Proposals to make participation in defined contribution plans the default option for workers could improve savings rates.
Source: The Automatic 401(k): A Simple Way To Strengthen Retirement Saving

Individual retirement accounts (IRAs) provide savings vehicles for all workers and their non-working spouses, although income limits constrain participation in particular types of the accounts. IRAs come in three forms: traditional, contributions to which are exempt from income tax until withdrawn; Roth, contributions to which come out of after-tax income but whose returns are never taxed; and nondeductible, contributions to which come from after-tax income but whose returns are not taxed until withdrawn. The first two kinds of IRA are subject to income caps and total annual contributions to all three cannot exceed specified limits (the smaller of earnings and $4,000 for workers under age 50; the dollar limit is $5,000 for those age 50 and older).
Source:Individual Retirement Accounts

undefinedThe deductibility of contributions to defined contribution plans and traditional IRAs benefits higher-income workers more than lower-income workers because higher-income workers contribute more and because the tax subsidy is proportional to income tax rates. TPC estimates show that the tax benefit for taxpayers in the highest quintile averages 1.4 percent of after-tax income, double that for taxpayers in the middle quintile and more than ten times that for taxpayers in the lowest quintile.
Source: Distributional Effects of Defined Contribution Plans and Individual Retirement Accounts

The tax code provides little incentive for low-income households to save and, partly as a result, only 20 percent of low-income households participated in a tax-favored retirement plans in 2003. TPC researchers have shown that strong incentives such as the Saver’s Credit can induce low-income households to save more.
Source: The Saver’s Credit: Issues and Options

Tax incentives to save for retirement saving have large costs in terms of forgone revenue. The exclusion of contributions to employer-provided plans reduced revenues by $104.1 billion in 2006; traditional IRAs and pension plans for self-employed individuals reduced 2006 revenues by $11.2 billion and $9.4 billion, respectively. In contrast, contributions to Roth IRAs have no revenue cost because they come from after-tax income but do reduce future revenues because earnings are never taxed.

Few workers contribute as much to their pension plans as the law allows: just 6 percent did so in 2003. Maximum contributions were much more common among high-income workers: more than half of workers with income above $150,000 contributed the maximum in 2003, compared with less than 1 percent of those with income below $50,000.
Source:Making Maximum Use of Tax-Deferred Retirement Accounts

Despite the many tax incentives available, many workers nearing retirement lack adequate retirement savings. In 2001, the median defined-contribution account balance for all workers aged 55 to 59 was just $10,400, including the third of those without accounts. Even among the near-retirees with accounts, median account balances totaled $50,000–not enough to purchase an annuity that would pay $4,000 per year.
Source:Balances in Defined Contribution Plans and IRAs

Additional Resources

Gene Steuerle’s 2005 testimony before the Senate Special Committee on Aging critiques existing tax incentives to save for retirement and offers proposals to improve their effectiveness. The Role of Employer-Sponsored Retirement Plans and National Saving.

Peter Orszag’s 2004 testimony before the Joint Economic Committee discusses the need to reform Social Security and strengthen incentives for workers to save for retirement. Strengthening Retirement Security.

Allowing taxpayers to convert traditional IRAs to Roth IRAs would effectively remove income limits on the latter at substantial cost in terms of forgone revenues. Leonard E. Burman, Roth Conversions as Revenue Raisers: Smoke and Mirrors” (2006).

The new Roth 401(k) complicates savings choices, will induce little to no new private saving, and could actually reduce long-term national saving. William G. Gale, J. Mark Iwry, and Gordon McDonald, An Analysis of the Roth 401(k) (2006).

Recent tax changes have raised contribution limits for retirement savings accounts but the higher limits will benefit few workers because most contribute well below the old maximum. Karen E. Smith and Eric Toder, Tax Law Changes Allow Employees to Contribute More to Tax-Deferred Accounts (2005).

Both pre-retirement withdrawals from IRAs and 401(k)s and insufficient withdrawals during retirement can trigger tax penalties. The share of tax returns with such penalties roughly doubled during the 1990s to nearly 4 percent in 2002. Peter Orszag, Penalties on IRAs and 401(k)s (2005).

Saving Incentives for Low- and Middle-Income Families: Evidence from a Field Experiment with H&R Block, by Esther Duflo et al. 2005.

Tax expenditures on provisions to encourage retirement saving have risen over the past decade while total personal saving has fallen, dropping below the level of tax expenditures in 2003. Part of the explanation is that savings provisions reward not saving but rather deposits, allowing taxpayers to obtain tax benefits simply by shifting funds from unsubsidized accounts to those that receive subsidies. Elizabeth Bell, Adam Carasso, and C. Eugene Steuerle, Retirement Saving Incentives and Personal Saving (2005).