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.

In 2016, members of the U.S. Women's National Soccer Team (WNT) took steps to fight for equal pay relative to the U.S. Men's National Soccer Team. Their legal representative declared that the memorandum of understanding governing the relationship between the players and the U.S. Soccer Federation (USSF) was terminable at will. If a court agreed with this position, the players could threaten to strike in advance of the upcoming Olympics. In addition, five of the top WNT players filed a wage-discrimination complaint against the USSF with the Equal Employment Opportunity Commission. This case describes the history of the WNT and the USSF leading up to these events.

In 2016, members of the U.S. Women's National Soccer Team (WNT) took steps to fight for equal pay relative to the U.S. Men's National Soccer Team. Their legal representative declared that the memorandum of understanding governing the relationship between the players and the U.S. Soccer Federation (USSF) was terminable at will. If a court agreed with this position, the players could threaten to strike in advance of the upcoming Olympics. In addition, five of the top WNT players filed a wage-discrimination complaint against the USSF with the Equal Employment Opportunity Commission. This case describes the events following from the actions of the WNT players.

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

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