How Would 401(k) ‘Rothification’ Alter Saving, Retirement Security, and Inequality?

36 Pages Posted: 8 Nov 2019 Last revised: 5 Mar 2020

See all articles by Vanya Horneff

Vanya Horneff

Leibniz Institute for Financial Research SAFE

Raimond Maurer

Goethe University Frankfurt - Finance Department

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

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Date Written: March 4, 2020

Abstract

The U.S. has long incentivized retirement saving in 401(k) and similar retirement accounts by permitting workers to defer taxes on contributions, levying them instead when retirees withdraw funds in retirement. This paper develops a dynamic life-cycle model to show how and whether “Rothification” — that is, taxing 401(k) contributions rather than payouts — would alter household saving, investment, and Social Security claiming patterns. We show that these changes differ importantly for low- versus higher-paid workers. We conclude that moving to a system that taxes pension contributions instead of withdrawals will lead to later retirement ages, particularly for the better-educated. It also would reduce work hours and lifetime tax payments and increase wealth and consumption inequality. In addition, we show how these behaviors would differ in a persistently low interest rate environment versus a more “normal” historical return world.

Keywords: pension taxation; 401(k) plan; retirement; saving; Social Security claiming; retirement income; minimum distribution requirements; inequality

JEL Classification: G11, G22, D14, D91

Suggested Citation

Horneff, Vanya and Maurer, Raimond and Mitchell, Olivia S., How Would 401(k) ‘Rothification’ Alter Saving, Retirement Security, and Inequality? (March 4, 2020). Michigan Retirement Research Center Research Paper No. MRDRC WP 2019-398, UM19-12 , Wharton Pension Research Council Working Paper No. 2019-20, Available at SSRN: https://ssrn.com/abstract=3481247 or http://dx.doi.org/10.2139/ssrn.3481247

Vanya Horneff

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Raimond Maurer

Goethe University Frankfurt - Finance Department ( email )

Grüneburgplatz 1
House of Finance
Frankfurt, 60323
Germany

Olivia S. Mitchell (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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