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

Vanya Horneff, Raimond Maurer and Olivia Mitchell
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Vanya Horneff: Finance Department, Goethe University
Raimond Maurer: Finance Department, Goethe University

Working Papers from University of Michigan, Michigan Retirement Research Center

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.

Pages: 43 pages
Date: 2019-09
New Economics Papers: this item is included in nep-age and nep-dge
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