The tax breaks in retirement savings plans such as IRAs and employer-sponsored programs “are much more likely to benefit high earners than their low-earning counterparts” and may not boost overall savings, says a report from the Center for Retirement Research.
“Upper-income taxpayers are more likely to have access to employer-sponsored retirement plans, are more likely to participate in their employer’s plan, and contribute more when they do participate,” it says, citing data that nearly 60 percent of the tax savings go to those in top income segments while less than 1 percent goes to those in the bottom fifth.
Recent changes in retirement savings plans further benefit those at higher income levels, it said. Those changes include raising the age at which minimum distributions must be taken, first from 70 ½ to 72, then to 73 currently with a scheduled further increase to 75 in 2033. “Generally, only the wealthiest will be able to benefit from this provision,” it said.
Another change, also set by the “Secure 2.0” Act of late 2022, will raise the limits on additional investments available to those age 50 and older; another study showed that those who made such investments “were overwhelmingly high earners.”
Studies have found that retirement savings plan tax breaks—whose value is estimated at nearly $190 billion a year—do increase participation in those plans, it said. But they may not result in an overall higher rate of savings because “people may simply shift savings from ordinary taxable investment accounts to tax-favored retirement accounts in order to reap the benefits of the tax preference.”
“If a household targeted a specific figure for their retirement saving, such as a dollar amount at retirement or the ability to replace some percentage of their pre-retirement earnings, a tax preference for retirement saving effectively increases the after-tax return,” which actually could result in lower savings, it said.
It said “the case is strong for curtailing these tax breaks” and dedicating what is now lost to the government in tax revenue to shoring up programs such as Social Security and Medicare.
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