The Impact of Modifying the Exclusion of Employee Contributions for Retirement Savings Plans from Taxable Income: Results from the 2011 Retirement Confidence Survey
20 Pages Posted: 3 Apr 2011
Date Written: March 1, 2011
Abstract
In recent years proposals have surfaced to reform the 401(k) system based on the assumption that higher-income individuals receive more tax-related benefits from these programs than do individuals in lower marginal tax brackets (as well as those who may pay no federal income taxes in a particular year). Some of these proposals have included modifications of the current federal income taxation treatment that excludes some or all of the contributions employees make to tax-qualified defined contribution plans. This paper provides some stylized examples of how the total tax advantage of some defined contribution plans varies by marginal tax rate and contrasts these values with the potential reduction in defined contribution balances if contributions were no longer “deductible.” This is followed by an analysis of two new questions from the 21st wave of the Retirement Confidence Survey (RCS) showing how workers would likely react if they were no longer allowed to deduct retirement savings plan contributions from taxable income. Results from EBRI modeling from the 2011 RCS find that these proposals may have unintended consequences. Instead of reducing the contribution levels of those with larger taxable incomes (and hence higher marginal tax rates), the RCS results suggest that the categories of full-time workers most likely to reduce (in some cases completely) their contributions are those with the lowest household income; the lowest current amounts in savings and investments (not including the value of their primary residence or the value of defined benefit plans); the lowest educational levels; those who are single, never married or not married, or living with a partner; and those who work for small private organizations.
The PDF for the above title, published in the March 2011 issue of EBRI Notes, also contains the fulltext of another March 2011 EBRI Notes article abstracted on SSRN: “Employer and Worker Contributions to Account-Based Health Plans, 2006-2010.”
Keywords: 401(k) Plans, Defined Contribution Plans, Employment-Based Benefits, Income Tax, Pension Plan Contributions, Retirement Attitudes and Opinions, Retirement Income, Retirement Plans, Savings, Taxation
JEL Classification: J26, J33
Suggested Citation: Suggested Citation