A new paper from the Center for Retirement Research at Boston College challenges the assumption that the tax deferral advantage offered by 401(k) plans mainly benefits high-income workers, who face higher marginal tax rates.
Most studies “assume that employer contributions to 401(k)s do not affect the total compensation that each worker receives — that is, every worker ‘pays for’ employer contributions in the form of lower wages,” write the authors, Eric Toder, co-director of the Urban-Brookings Tax Policy Center and Karen E. Smith, senior research associate at the Urban Institute.
Their paper, “Do Low-Income Workers Benefit From 401(k) Plans,” challenges this assumption, testing whether employer contributions may actually increase total compensation for low-income workers, who may be more reluctant than high-income workers to accept wage reductions in exchange for retirement saving contributions.
Using data from the Survey of Income and Program Participation, a nationally representative longitudinal survey of households conducted by the Census Bureau, and longitudinal Social Security administrative earnings data from the Summary Earnings Records and Detailed Earnings Records, Toder and Smith determined that additional employer contributions raise total compensation for low-income workers by about 70 cents to 90 cents per dollar of contribution.
“The findings imply that low-income workers receive a benefit that is separate from the tax deferral: their total compensation rises due to 401(k) contributions from their employers,” they conclude.
The full brief is available here.
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