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Upside-Down Tax Incentives

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Abstract

Retirement is ultimately a costly proposition since people can spend decades without earning money from work and taking care of their loved ones and themselves. They hence need to save a lot of money outside of Social Security for their own future. Policy offers some help to people wanting to save for their retirement, but it provides the least help to those who face the largest risk exposure and thus greatest obstacles to saving more. The federal government already uses the tax code to incentivize people to save, typically through tax advantages for particular savings such as retirement savings in 401(k) plans. But these savings incentives are complex and favor higher income earners over those with lower earnings. The help that the tax code offers consequently does little to combat the growing retirement crisis since it fails to adequately target those who actually need help.

Keywords

Income Earner Retirement Plan Retirement Saving Lower Income Earner High Income Earner 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 4.
    Shlomo Bernartzi and Richard Thaler, “Heuristics and Biases in Retirement Savings Behavior,” Journal of Economic Perspectives 21, no. 3 (Summer 2007), 81–104.CrossRefGoogle Scholar
  2. 6.
    Sheena Sethi-Iyengar and others, “How Much Choice Is Too Much? Contributions to 401(k) Retirement Plans,” in Olivia S. Mitchell and Stephen P. Utkus, eds., Pension Design and Structure: New Lessons from Behavioral Finance (New York, NY: Oxford University Press, 2004).Google Scholar
  3. 28.
    Eric M. Engen and William G. Gale, “The Effects of 401(k) Plans on Household Wealth” (Washington, DC: National Bureau of Economic Research, 2000);CrossRefGoogle Scholar
  4. Daniel J. Benjamin, “Does 401(k) Eligibility Increase Saving?” Journal of Public Economics 87, no. 5 (2003), 1259–1290.CrossRefGoogle Scholar
  5. 32.
    There is a substantial debate in the literature over the exact discount rate to use for retirement calculations. For a discussion of discount rates for DB pension plans, see Christian Weller and Dean Baker, “Smoothing the Waves of Pension Funding: Could Changes in Funding Rules Help Avoid Cyclical Under-funding,” The Journal of Policy Reform 8, no. 2 (June 2005), 131–151. I choose six percent here as the discount rate to make my results comparable to others, specifically those generated by the ICI’s Peter Brady.CrossRefGoogle Scholar

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© Christian E. Weller 2016

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