SURVEY SAYS: Would a Change in Tax Deductibility Change Savings Rates?

April 7, 2011 ( - The Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI) indicated that the deductibility of retirement savings contributions was important to workers, particularly among lower-income workers.  

Despite that, the deductibility of those pre-tax contributions continues to be a potential target for those seeking to find additional sources of revenue for the federal government (you can read the EBRI report HERE).   

This week I asked readers what they thought would happen to participant savings rates if that tax deductibility was changed.   

Perhaps not surprisingly, more than half (54.8%) of this week’s respondents thought that most participants would save less.  What I found striking was that another quarter (25.2%) said they thought that most participants would save a LOT less. 

Fewer than one-in-ten (9.6%) thought that most would save the same, while another 6.1% thought that most would save in other places. 

The remaining 4.3% admitted they had “no earthly idea” what participants would do – but not a single respondent thought that most would save more. 

Now, as you might expect, we got a lot of interesting and informed perspectives from respondents to this week’s survey – I trust you’ll enjoy perusing those on the following pages – not to mention our Editor’s Choice!   And it all begins HERE

Thanks to everyone who participated in our survey! 

Without a doubt people would save less since this change will impact their net pay.  Participants will drop their contribution rate to the point that it has no impact on their net. 

Non qualified plans cover a much smaller, but much richer group of people.  If we need more revenue, we should tax the plans for the super rich, i.e. baseball, football players, etc.   Their non qualified plans are non qualified because they cannot live with the limits set upon 401(k) plans.   We paid for their stadiums, it's time for them to kick in their share." 

Participants would adjust (reduce) their retirement savings to maintain the same net pay. 

Savers will save and non-savers won't.  I think it's truly as simple as that. 

I think most would save less.  If the tax deductability were taken away, then what is the incentive to save in a 401k versus an outside Roth or Traditional IRA??  The outside IRA would also provide a wider selection of investment options although investment expenses may be higher. 

I'm only a few years from retirement, so I would continue to save.  However, I do love the tax break it gives me. 

Just like with automatic enrollment, participants tend to be passive about their plan participation.  There will be a spiff of activity from those who think they know what to do, but overall it will be a big to do about nothing.    Those in the business will just emphasize other features of the plan. 

"The moderate to low income folks aren't focused on tax savings but are saving the most they can, if they are saving at all.   

The effect would be most obvious in the upper to high income folks who often spend every dime they make and are not good savers.  The 401K limit give them a defined ""requirement amount' to save that their advisors tell them they should. If you removed the tax deduction, I doubt this group would save as much as they do today." 

Honestly, I don't think the tax break is more important to lower income workers than it is for higher income workers...if anything, I'd say it’s the opposite.  I know the survey says the opposite, but personal experience leads me to believe otherwise.  I used to conduct employee enrollment meetings, and from my experience often times the lower income workers weren't paying hardly anything in taxes anyway, so the tax savings didn't do much for them.  The higher income individuals were the ones most concerned with the tax break, and who I think will be most likely to change their behavior if the tax break is lost. 

Some figure their taxes, then calculate what amount to deposit to their IRA account so that they can drop a level in income taxes.  Take away the tax status and there would be no incentive to put the money away.  Likewise, if no longer tax free, I would put the money in a regular savings account, but trouble there is I would not be penalized for taking the money out early for perceived needs. 

I think participant's savings behavior will depend greatly on whether the Roth 401(k) would continue.   If it does - I would guess participants would save less to be current tax neutral, if it doesn't continue, then savings would probably be a lot less. 

DB plans are much more efficient at delivering retirement dollars.  We should encourage more DB plans! 

If the pre-tax basis was removed would all these plans be Roth plans?  If not, what happens to Roth plans? 

I'd expect more employees would 'save down to the match' --- this would affect mid- to higher paid employees.  I truly don't think deferred tax feature is key to a majority of lower paid employees. (and don't ask me to define that range!) 

Since thinking about the future is not something usually very pleasant, I think a lot of people would forgo savings if they were not getting a tax break for doing it. I base that on the fact that our regular savings is taxed on its income, and the US has a very low personal savings rate. When you get less than 1% interest and then you pay taxes on that meager amount, where is the incentive to save?? 

"Ya canna change the laws of physics!"  Inertia would continue to rule. 

The case for saving to obtain employer match would be the driver for savings rates in the qualified plan.  After that is reached, savvy participants will look for other more favorable tax options for saving (e.g., Roth accounts outside of the plan). 

We are a society that wants rewards now, not years down the road.  If we want people to save seriously for retirement and begin that process when they are young, then we need to give them a reward.  There are too many things to spend money on right now and they are concerned that they will not live long enough to retire.  If people don't save, and don't have family to care for them, will a bankrupt government pick up the slack?  Just because the government can't figure out how to budget their money does not mean that individuals should shoulder an even greater burden.  The irresponsible people, that we somehow elected, need to set a responsible course for our nation - otherwise, we will go the way of the Roman Empire. 

"That's a good question!  I know when I first started saving, the fact that POTENTIALLY, my take home pay could go UP if I saved more in 401K was a selling point.  I was not, of course, one of those whose pay did rise.  It's always been an incentive to save because of the tax break.  If they removed it, I'd still save, but would I do it in a 401K?  What would the benefit be?  Lower fees?  I might be inclined to put my money where I could work with it more easily.   

There are a lot of other ways to reduce our deficits without touching this one.  And I'm not just taking the "Not In My Backyard" (NIMBY) self-protection approach here.  We have a retirement savings problem (crisis?) in this country, and this is counter-productive. 

Those who budget to save will continue, but will save a few dollars less.  This is because their budget is already so tight. 


They should remain deductible, discontinuing deductibility would have a dramatic change in savings. 

"This smacks of continuing focus on short term goals -- like big business, big government indulges too. 

Saving for retirement should be encouraged.  That is what pre-tax savings do.  The government will get the tax revenue eventually, but government wants it now!  Hmmmm!" 

We are completing the elimination of the last holdout DB plans and getting a running start on destroying our society's safety nets. Working people, who tend to vote Democratic, will not have enough to survive retirement, will die young and will not vote any more. That, of course, is an unintended consequence which, by the most unlikely of coincidences, directly benefits the decision-makers. 

I don't think most people know enough to care about the pre/post-tax implications.  But if post-tax was the only option I don't think savings rates would change because the need to save for retirement would remain. 

It's hard to judge what the general population will do especially given that they don't do anything on their own.  If it wasn't for automatic enrollment, they wouldn't be saving at all.  So, given that auto enrollment would stay, my guess is that they would still save.  The more in-tune savers would probably seek other places to save their money since it would be no longer beneficial to save in an employers 401(k). 

It is ridiculous to discourage workers from saving by removing or restricting further the ability to save on a pre-tax basis.  It's difficult enough to persuade people to save enough money for retirement without removing the persuasive facilitator of pre-tax savings. 

If the Roth option were still available, folks might end up better off saving on the after-tax basis.  What is frightening, however, is the fact that the limits may be severly restricted.  Won't be a dramatic impact for me, as my retirement account is in fairly good shape.  It's my kids that I worry about. 


Given that the deductibility has long been touted as one of the great benefits to saving in a 401k plan, it's hard to imagine how anyone, especially those who had been doing the touting, could now argue that it would no longer be an incentive to saving. 

There may be more demand for employer contributions, as long as they stay tax deductible...but if the employee can't deduct, I can see the deductibility of employer contributions being targeted too...that would be a real nightmare. 

Deductibility is very often touted as an incentive for saving in a retirement plan. People who would not otherwise save seem often to be influenced by that incentive. 

There is a finite amount of money available each month, and taxing retirement savings would reduce that amount.  My guess is those people who are already in a financial pinch would still need to pay those tangible, in-the-moment expenses.  The money for retirement is hypothetical, and therefore savings would decrease. 

Anyone looking to find additional sources of revenue should lobby for a higher tax rate for the wealthiest among us and ensure that corporations pay their fair share.  Leave the middle and lower income workers alone!! We pay way more than our share. 

Just what we need!  Social Security is going bankrupt sooner rather than later and now they want to remove the best incentive for increasing your 401k contribution.  What will they think of next??? 

Higher wage earners are not the only employees who appreciate the benefit of tax savings.  Last year we implemented an Automatic Contribution Arrangement (3%) in our 401k plan and many of our lower wage earners have been thrilled to see that they now have a retirement savings account without feeling a significant loss in their net paychecks.  When we explain that they either pay themselves now or pay taxes now, they happily choose to pay themselves. 


And a new industry of scams would develop to replace employer savings vehicles. 

It's curious that lower-income workers value the deductibility most highly.  They get less benefit because they are in lower brackets, and in some cases get no effective benefit because they don't end up owing taxes. 

I have no earthly idea, but I do believe in the laws of inertia. 

Considering that taxes will most likely go up in the future when most of us are retired, maybe the pre-tax basis benefits really aren't that beneficial today. 

In all likelihood, most everyone would drop the 401K in favor of nothing or something else. 

For lower income individuals that live pay check to pay check, even a $10 decrease in their net take home pay could get their attention.  If it does, that could result in them lowering their deferral % in an effort to get their net pay back to where it was when their deferrals were pre-tax.  Once the thought of dropping your deferral rate enters your mind, the temptation to drop it to 0% surfaces.  Even if the intent is to drop it to 0% until "I get back on my feet", the chances they will reenroll in the near future are slim.  Higher income individuals are likely to continue to save. 

I can think of a LOT of better places for "additional sources of revenue." Hello, Defense Department! 

I think deductibility is a significant incentive for individuals, so more newly-eligible participants would decline to participate than previously.  However, for people who get the need to plan and save, they will continue.  Theoretically, they could save a little less, since the income in retirement would be nontaxable.  All in all, bad news for the retirement industry. 

It's absolutely outrageous.  On the one hand the Government is slowly destroying Social Security and on the other, they are making it harder for people to save for themselves?  It's thoughtless and very short-sighted. The HCEs can't save any more than the NHCEs in a 401(k) so they can't say they're trying to tax the wealthy more. I've been convincing employees to save more with the pre-tax argument for years.  Many participants can't afford to save if they don't get the tax benefit.  The pre-tax benefit definitely makes it easier for the NHCE to save. 

Among my favorite responses were the following: 

Lower paid employees would have to defer less to cover the increase in taxes.and keep their take home pay the same. 

Driving participation rates higher is hard enough already.  Reducing the most obvious and understandable benefit of deferring will only make most people say why bother? 

This is a terrible idea, particularly for lower income workers. Savings would dry up like a sponge in a desert. 

For 40+ years the major educational tool used by plan sponsors to increase participation is the advantage of tax-deferred saving and tax-deferred investment gains. Because of this, many participants' first thought (knee-jerk reaction) would be- 'then why save for retirement if I lose tax deferral?' 

"For so many people, this is the ONLY way they save.   We should not remove the ability for the average person to save on a pretax basis through a qualified plan.    

Kinda shoots the savings sales pitch of "what you don't have you don't miss" right in the foot, doesn't it. On the bright side, it might serve as the catalyst for introducing the Roth to our retirement savings plan.(gawd, don't you just hate those 'bright' kind...someone just slap him please) 

I believe most participants would be completely unaware of the change, as they are of most economic information, and of those that were aware, only a few would resist inertia and act on the knowledge. 

Hopefully we will not have to find out! 

Critical to maintaining participation at all income levels!  When you do a presentation showing employees how they can have $10 in savings or $7 in take-home pay (more if there is a match) it becomes a no-brainer, particularly if coupled with some aggressive communication about the need to accumulate some personal savings if they want to ever retire.  Removing the tax deductibility takes away our strongest incentive to pushing workers toward more independence and taking responsibility for their long-term savings for retirement. 

Pointing out the tax advantage is one way that I am able to get employees to sax for their retirement. 

I think most would save the same as they are now because they probably would not take the trouble to change their automatic pay deduction and leave it as it.  However, I don't think they will increase the amount of savings and instead save it in other places. 

Seriously!? In my company, we promote an interactive paycheck calculator to demonstrate the pre-tax savings of those benefits that offer pre-tax options, 401(k) being one of them! So, yes, a good percentage of our population would opt out of saving for retirement using the 401(k) as a vehicle since there are restrictions on when they could take their money, beyond them having to quit their job. And, I am not convinced those same people would save other places since that's an exercise (both emotionally and physically - conducting research, etc.) that our general population would not undertake, even though we offer direct deposit to unlimited sources. 

Since one of my major "selling points" is that since the contribution is a pre-tax deferral, they will not feel the full effect of the deferral in their net.  Should that pre-tax be taken away, they will defer less because they don't believe they can have less take-home pay to live on...even though we have an exceptional match of $.75 on the first 10% deferred. 


Deductibility is a big selling point to lower wage earners especially, because they're operating on the bottom line--take home pay.  If they're saving anything & the take-home pay is not significantly reduced, everyone comes out a winner. 

I am sick sick sick of the government's manipulation of numbers.  The FACT is that retirement savings is not a tax expenditure, but a DEFERRAL of taxation.  However, the way the formulas work, they are not allowed to take revenues into account that would be anticipated beyond ten years.  This leads to horrible discussions on public policy based on flawed information.  A simple present value study with reasonable assumptions would show that the present value of all future tax receipts is at least equal to, if not higher than the current tax give up.  A significant contributor to this is the fact that all gains would be taxed at ordinary income rates, rather than capital gains rates.  Unfortunately, our government is too mathematically illiterate to understand.  

But this week’s Editor’s Choice goes to the reader who said “I hope to God the government doesn't muck with that." 

Thanks again to everyone who participated in our survey!