Working Paper: NBER ID: w26437
Authors: Vanya Horneff; Raimond Maurer; Olivia S. Mitchell
Abstract: The US 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 would also reduce work hours and lifetime tax payments and increase consumption inequality in retirement. In addition, we show how these behaviors would differ in a persistently low interest rate environment versus a more “normal” historical return world.
Keywords: No keywords provided
JEL Codes: D14; D91; G11; G22; G23; G28; G5; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax treatment of pension contributions (H55) | retirement timing decisions (J26) |
| transitioning from tax-deferred (EET) to tax-exempt (TEE) regime (H26) | later retirement ages (J26) |
| transitioning from tax-deferred (EET) to tax-exempt (TEE) regime (H26) | reduced work hours (J22) |
| transitioning from tax-deferred (EET) to tax-exempt (TEE) regime (H26) | lower lifetime tax payments (H31) |
| transitioning from tax-deferred (EET) to tax-exempt (TEE) regime (H26) | increased consumption inequality in retirement (D15) |
| prevailing interest rates (E43) | saving and investing behaviors (D14) |
| tax structure (H20) | saving behavior (D14) |
| tax structure (H20) | retirement claiming patterns (J26) |
| tax structure (H20) | overall consumption inequality (F62) |