Does Front-Loading Taxation Increase Savings?

John  Beshears; James J. Choi; David  Laibson; Brigitte C. Madrian

Article | Journal of Public Economics

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

by John Beshears, James J. Choi, David Laibson and Brigitte C. Madrian

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.

Keywords: Saving; Retirement; Taxation;

Format: Print

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Citation:

Beshears, John, James J. Choi, David Laibson, and Brigitte C. Madrian. "Does Front-Loading Taxation Increase Savings? Evidence from Roth 401(k) Introductions." Journal of Public Economics 151 (July 2017): 84–95.

Does automatic enrollment into retirement savings plans increase borrowing outside the plan? We study this question using a natural experiment created when the U.S. Army began automatically enrolling its newly hired civilian employees into the Thrift Savings Plan (TSP) at a default contribution rate of 3% of income. We find that four years after hire, automatic enrollment causes no significant change in debt excluding auto loans and first mortgages (point estimate = –0.6% of income), auto debt (point estimate = 1.1% of income), or first mortgage balances (point estimate = 2.2% of income). The auto and first mortgage debt effects’ point estimates are large relative to the savings effect inside the TSP (point estimate = 4.1% of income) and are statistically significant in some specifications. Inferences about total effects on net worth depend on what automatic enrollment is doing to non-TSP assets, which we do not observe.

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

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