How Workers Might React to Modifying the Exclusion for Retirement Contributions

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. 

Who would be affected?  Results from EBRI analysis of the 2011 Retirement Confidence Survey (RCS) finds 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; 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.

Press release is online here. Full report is online here.

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President and CEO, EBRI

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