Do Tax Incentives Increase 401(K) Retirement Saving? Evidence from the Adoption of Catch-Up Contributions

CRR WP 2014-17

37 Pages Posted: 26 Nov 2014 Last revised: 16 Jul 2016

See all articles by Matthew S. Rutledge

Matthew S. Rutledge

Boston College, Center for Retirement Research

April Yanyuan Wu

Mathematica Policy Research, Inc.

Francis M. Vitagliano

Boston College - Center for Retirement Research

Date Written: November 1, 2014

Abstract

The U.S. government subsidizes retirement saving through 401(k) plans with $61.4 billion in tax expenditures annually, but the question of whether these tax incentives are effective in increasing saving remains unanswered. Using longitudinal U.S. Social Security Administration data on tax-deferred earnings linked to the Survey of Income and Program Participation, the project examines whether the “catch-up provision,” which was enacted in 2001 and allows workers over age 50 to contribute more to their 401(k) plans, has been effective in increasing earnings deferrals. Compared with similar workers under age 50, the study finds that contributions increased by $540 more among age-50-plus individuals who had approached the 401(k) tax-deferral limits prior to turning 50, suggesting that the older individuals respond to the expanded tax incentives. For this group, the elasticity of retirement savings to the tax incentive is quite high: a one-dollar increase in the tax-deferred limit leads to an immediate 49-cent increase in 401(k) contributions.

Keywords: 401(k), catch-up provision, tax incentives, elasticity

Suggested Citation

Rutledge, Matthew S. and Wu, April Yanyuan and Vitagliano, Francis M., Do Tax Incentives Increase 401(K) Retirement Saving? Evidence from the Adoption of Catch-Up Contributions (November 1, 2014). CRR WP 2014-17, Available at SSRN: https://ssrn.com/abstract=2530026 or http://dx.doi.org/10.2139/ssrn.2530026

Matthew S. Rutledge (Contact Author)

Boston College, Center for Retirement Research ( email )

Boston, MA
United States

HOME PAGE: http://crr.bc.edu/researchers/matthew_s_rutledge.html

April Yanyuan Wu

Mathematica Policy Research, Inc. ( email )

P.O. Box 2393
Princeton, NJ 08543-2393
United States

Francis M. Vitagliano

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States

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