Does Front-Loading Taxation Increase Savings? Evidence from Roth 401(k) Introductions
by John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian - #20738 (AG)
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 the Roth introduction, which means that the amount of retirement consumption being purchased by 401(k) contributions increases after the Roth introduction. A survey experiment suggests two behavioral factors play a role in the unresponsiveness of contribution rates to their tax treatment: (1) employee confusion about or neglect of the tax properties of Roth balances and (2) partition dependence.
http://papers.nber.org/papers/W20738?utm_campaign=ntw&utm_medium=email&utm_source=ntw
4. The Long Reach of Education: Early Retirement by Steven Venti, David A. Wise - #20740 (AG)
Abstract:
The goal of this paper is to draw attention to the long lasting effect of education on economic outcomes. We use the relationship between education and two routes to early retirement - the receipt of Social Security Disability Insurance (DI) and the early claiming of Social Security retirement benefits - to illustrate the long-lasting influence of education. We find that for both men and women with less than a high school degree the median DI participation rate is
6.6 times the participation rate for those with a college degree or more. Similarly, men and women with less than a high school education are over 25 percentage points more likely to claim Social Security benefits early than those with a college degree or more. We focus on four critical "pathways" through which education may indirectly influence early retirement - health, employment, earnings, and the accumulation of assets. We find that for women health is the dominant pathway through which education influences DI participation.
For men, the health, earnings, and wealth pathways are of roughly equal magnitude. For both men and women the principal channel through which education influences early Social Security claiming decisions is the earnings pathway. We also consider the direct effect of education that does not operate through these pathways.
The direct effect of education is much greater for early claiming of Social Security benefits than for DI participation, accounting for 72 percent of the effect of education for men and 67 percent for women.
For women the direct effect of education on DI participation is not statistically significant, suggesting that the total effect may be through the four pathways.
http://papers.nber.org/papers/W20740?utm_campaign=ntw&utm_medium=email&utm_source=ntw
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3 comments:
"The goal of this paper is to draw attention to the long lasting effect of education on economic outcomes."
May I suggest they look at the social security payroll tax on US savings since 1937. However, the paper really does not get into which is better IRA or Roth.
A person who saves with an IRA their entire working life will end up in a higher tax bracket at retirement subjecting any SS to federal income tax.
After looking at this catch 22 for decades, there is a mathematical method to determine the ratio of Roth to IRA based on the income in that year.
Generally contributing to a Roth when there is no tax owed is a mistake, put it in a Roth. Prior to the Roth, some people contributed to IRA's when it did not save them taxes, simply for the tax deferment.
The objective is to minimize the tax rate (unknown) when you retire. Roth's do this 100%. IRA's withdrawls most likely will be 100% to you income. You need to look at the lowest tax bracket for single and married to figure out what income amounts will push you into the next bracket.
"Generally contributing to a Roth when there is no tax owed is a mistake, put it in a Roth."
Is this a typo? I do not understand.
I am retiring well before I am eligible for SS. Putting money in 401k turned out to be very efficient. Of course, to be able to retire early, I actually used both 401k and Roth.
I expect to defer taking SS past RA.
Ooops, now I made a typo.
past Normal Retirement Age
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