Veritas propter investigationem [Truth through research]
TitleFlattening Tax Incentives for Retirement Saving (2014)
AuthorsBarbara Butrica
 Benjamin Harris
 Pamela Perun
 Eugene Steuerle
InstitutionUrban Institute
TopicsTax incentives for retirement saving
 Public policy
 Saving for retirement
CountryUnited States
Date Published2014
Date posted on PR16 Dec 2014
Butrica, B Harris, B Perun, P Steuerle, E, (2014). Flattening Tax Incentives for Retirement Saving (2014) Urban Institute,

PensionReforms’ summary and comments

All governments try to influence citizens’ retirement saving behaviour by either compulsion or, most commonly, tax breaks for saving into particular kinds of retirement income schemes.  These schemes are typically taxed under the EET framework that confers a significant, lifetime benefit over the way those savings might have been taxed under a more ‘natural’ income tax framework (TTE).


There is surprisingly little information as to whether tax breaks for retirement saving actually increase savings overall (given that a saver’s benefit from the concession is another taxpayer’s cost) but that is not the only problem with concessions.  They are also regressive (favour the rich over the poor) and inequitable.


This 2014 report looks at how these two difficulties might be eased in the US.


“Under existing law, only a small share of tax benefits for retirement saving accrues to those in the bottom half or even the bottom three-quarters of the income distribution.”


A survey shows that 40% of households headed by someone near retirement (55-64) had no money in a retirement savings account.  The median balance in this group is just $12,000 (2013).  Because the value of tax concessions follow contributions, it is clear that tax breaks are very regressive.


“Flattening the benefit schedule could make the opportunities for those currently left out more equal.”


In the past, there has been little information on what the effect of flattening the value of concessions might be and the report tries (tentatively) to fill that gap both on an annual and a lifetime basis.


“The simulations shown here demonstrate how certain generic proposals—further limits on existing contribution levels, expansion of the saver’s credit, and conversion of the existing exclusion to a credit—could affect the distribution of tax benefits and lifetime incomes.”


But these can only be “suggestive”:

“They do not reflect the many behavioral adjustments that might take place, nor do they account for the details of any related legislation that might be required, such as how to limit withdrawals of tax credits soon after contributions are made or how credits for saving can be kept in retirement accounts rather than, as under current law, provided as tax refunds that might be spent right away.”


PensionReforms has a better idea – unless it can be demonstrated that tax incentives for retirement saving actually lift the level of savings (either at a micro or a macro level) why not get rid of them altogether?  New Zealand did that over 1987-1990 and offers lessons on how (and how not to) go about that.  There is now a very modest personal tax credit (maximum $520 a year) on KiwiSaver contributions but that is all.  There is no evidence of New Zealanders’ under-saving for retirement (see here, here and here) and no compelling reason to continue with the KiwiSaver tax credit.


Unless the government can explain why it offers a special tax deal for particular forms of savings and then demonstrate that it achieves those objectives, the fact that every other country offers similar incentives is not a compelling reason to stay with current policies.  Of course the current labyrinthine, regulatory framework could be improved but even the improved version is unlikely to work.  It will just do so on a slightly more equitable basis. (File size 321 KB; 28 pp) 711