Does It Pay to Save?

Source: Laurence J. Kotlikoff and David S. Rapson, National Center for Policy Analysis, NCPA Study No. 298, June, 2007

Summary

Does it pay to save? The answer is often no. In fact, penalties for saving are astronomical for some households, particularly young, single-parent and lower-income families. But these are the very people who need the strongest incentives to save for retirement.

Determining the effective marginal tax on additional saving is difficult because of the complexity of the tax code and the interaction of different government tax and transfer programs (such as food stamps) that are limited to households below certain income and asset ceilings. Saving and wealth accumulation can put a family over an asset limit and cost thousands of dollars in lost benefits.

To calculate the effective marginal tax on saving, this study uses financial planning software that carefully determines tax and transfer payments at each stage of a person’s life, based in part on economic choices they make in prior periods. The model assumes people try to even out consumption over their lifetimes.
The results: For single parents with two children, effective marginal taxes on savings are regressive – lower-income households pay higher rates than high-income households.

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