It’s a great question, asked and answered by the Center for Retirement Research at Boston College. And that answer is? No, not really. The theme is tackled in CRR’s latest issue brief, which comes in response to calls for higher annual 401(k) contribution limits as a possible solution to the dismal savings rate for individuals in the United States.
“The contribution limits have long been adjusted for inflation but, in 2001, policymakers increased the limits at a faster rate through 2005,” according to the organization. “They also introduced a catch-up provision, establishing a much higher contribution limit for workers age 50 and over. The idea behind the provision is that individuals, who may postpone saving for retirement when they are younger, need to step up their saving as their retirement age starts to loom larger.”
The basic contribution limit rose from $10,500 in 2001, just before the new law took effect, to $14,000 in 2005 while the allowable catch-up contribution went from $0 to $4,000 during this period.
The result was that “only those near the maximum respond to increased tax incentives to save in 401(k)s, which is consistent with previous research.”
The invariable conclusion is that few participants – only about 10 percent – are constrained by the limits.
“The bottom line is that further tinkering with the contribution limit for 401(k)s would likely affect only a very small group of people; it does not offer a broad-based solution for low saving rates in the United States.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
