The Limits of Saving
UI, The Retirement Project, Occasional Paper No. 7
21 Pages Posted: 31 Dec 2000
There are 2 versions of this paper
The Limits of Saving
Date Written: August 2000
Abstract
Congress has proposed raising the legal limits on contributions to defined contribution plans in the private pension system to increase the amount people can save for retirement. Using a model of hypothetical lifetime savings, this paper analyzes the current proposals in a sample of defined contribution plans which permit individuals to choose how much to save every year. The analysis demonstrates first that the current limits comfortably accommodate reasonable, plausible savings rates. The proposals only benefit individuals who can save at extremely high rates. Second, the proposals do not increase the average or marginal tax subsidies for savings available through the private pension system and may well decrease them for individuals at the lowest income levels. Third, the proposals will, however, increase the absolute amount of dollars received in tax subsidies but the distribution pattern of those dollars across income groups will remain the same. The paper concludes that these proposals fail to deliver the fundamental reform needed by the private pension system. It suggests that any reform efforts should focus more on incentives and subsidies for those who are left out and left behind in the current system rather than for those who don't need them to save.
Keywords: Private pension system, defined contribution plans, saving, reform, retirement, subsidies, incentives
Suggested Citation: Suggested Citation