Does Front-Loading Taxation Increase Savings? Evidence from Roth 401(k) Introductions

John Beshears, James Choi, David Laibson and Brigitte Madrian

No 20738, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Can governments increase private savings by taxing savings up front instead of in retirement? Roth 401(k) contributions are not tax-deductible in the contribution year, but withdrawals in retirement are untaxed. The more common before-tax 401(k) contribution is tax-deductible in the contribution year, but both principal and investment earnings are taxed upon withdrawal. Using administrative data from eleven companies that added a Roth contribution option to their existing 401(k) plan between 2006 and 2010, we find no evidence that total 401(k) contribution rates differ between employees hired before versus after Roth introduction, which implies that take-home pay declines and the amount of retirement consumption being purchased by 401(k) contributions increases after Roth introduction. We reject several neoclassical explanations for our null finding. Results from a survey experiment suggest two behavioral explanations: (1) employee confusion about and neglect of the tax properties of Roth balances and (2) partition dependence.

JEL-codes: D03 D14 G02 H2 H3 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-pbe
Note: AG
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Citations: View citations in EconPapers (1)

Published as John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2015. "Does front-loading taxation increase savings? Evidence from Roth 401(k) introductions," Journal of Public Economics, .
Published as Does Front-Loading Taxation Increase Savings? Evidence from Roth 401(k) Introductions , John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian. in Personal Income Taxation and Household Behavior (TAPES) , Gordon and Keuschnigg. 2016

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Chapter: Does Front-Loading Taxation Increase Savings? Evidence from Roth 401(k) Introductions (2017)
Journal Article: Does front-loading taxation increase savings? Evidence from Roth 401(k) introductions (2017)
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