Discussant: Annika Sunden, Boston College
Mark J. Warshawsky examined the following questions: (1) Are statutory limits to contributions for tax-deductible plans binding? (2) If so, for which groups? And which limits? (3) What is the impact of plan participation on consumption over the life cycle? (4) What is the lifetime tax benefit for particular groups? Their paper used the Economic Security Planner (ESP) software to model realistic saving decisions over the life cycle. They found that DC plan contribution limits are often binding, especially at older ages. In terms of tax benefits, they found positive tax subsides from plan participation for all groups, with the largest benefits going to those with higher lifetime incomes.
Their policy implications were: (1) Catch-up provisions make good sense; (2) Increase in 401(k) and IRA contribution limits make sense; (3) Age-weighted DC plans are a good idea; (4) Incentives to increase pension plan coverage and participation would improve equity.
Annika Sunden stressed that households are liquidity constrained and so start saving later in life. However, she also said that even for these later starting households the limits are only binding for high-income households. She quoted government statistics that only 5% of earners contribute the limit to 401(k) plans.
