Retirement Savings Tax Breaks Disproportionately Benefit Wealthy

Tax breaks

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Tax breaks designed to increase Americans’ retirement savings disproportionately benefit high income households and do little to assist middle class families, finds a new report out today from the National Institute on Retirement Security.

More than half of the tax breaks for defined contribution (DC) plans and Individual Retirement Accounts (IRAs) go to those in the top 10% by income. Also, the top 30% of workers by income receive 89% of the present value of tax benefits for DC plans and IRAs. This leaves a “missing middle” because the tax code offers meager benefits for these working Americans to save for retirement. At the same time, these middle class workers face rising costs in retirement, often lack retirement plans at their jobs, and need more than just Social Security income in retirement to maintain their standard of living.

“The middle class is left behind by the retirement savings system in key ways, including tax breaks.”

Dan Doonan, NIRS

“Saving for retirement is one of the biggest financial challenges facing middle class families,” said Dan Doonan, NIRS executive director. “But the middle class is left behind by the retirement savings system in key ways, including tax breaks.”

The findings are contained in a new research report from NIRS, “The Missing Middle: How Tax Incentives For Retirement Savings Leave Middle Class Families Behind” (Read the research here).

The report documents how current tax incentives fail to promote adequate retirement security for the middle class. It considers the impact of factors including marginal tax rates, retirement plan participation, and income distribution on retirement saving levels. The research also offers potential solutions that could enhance retirement security for middle class families.

“It’s encouraging that policymakers are examining the nation’s retirement savings shortfall. But it will be important to really drill down to understand what policy levers can make a difference for the millions of middle class Americans who are not accumulating adequate retirement savings,” Doonan explained. “For example, policy areas to look at would be strengthening Social Security, increasing access and participation in retirement plans, reforming the deduction-based tax system, and ensuring the tax breaks are directed at generating retirement income. Together, such policy changes could make a real impact toward ensuring working Americans will have ample income to be self-sufficient and maintain their standard of living in retirement.”

The report’s key findings are as follows:

The National Institute on Retirement Security is a non-profit, non-partisan organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy as a whole. Located in Washington, D.C., NIRS membership includes financial services firms, employee benefit plans, trade associations, and other retirement service providers.

SEE ALSO:

• Pension Plans Cheaper than 401ks, Report Argues

• Half of Social Security Beneficiaries May Pay Tax on 2022 Benefits

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