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

Vanya Horneff, Raimond Maurer and Olivia Mitchell

No 26437, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D14 D91 G11 G22 G23 G28 G5 G51 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-age, nep-dge, nep-lma and nep-ltv
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Published as Vanya Horneff & Raimond Maurer & Olivia S. Mitchell, 2023. "How would 401(k) ‘Rothification’ alter saving, retirement security, and inequality?," Journal of Pension Economics and Finance, vol 22(3), pages 265-283.

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Journal Article: How would 401(k) ‘Rothification’ alter saving, retirement security, and inequality? (2023)
Working Paper: How would 401(k) "Rothification" alter saving, retirement security, and inequality? (2022)
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