Life-cycle saving, limits on contributions to DC pension plans, and lifetime tax benefits
This paper analyzes questions related to defined contribution (DC) plans. For what types of households are statutory contribution limits likely to bind? How large is the lifetime tax benefit from participating in a DC plan and how does it vary with lifetime income? The authors find that contribution limits bind for households that begin their plan participation late in life or wish to retire early, single-earner households, those who are not borrowing-constrained, those with rapid rates of real wage growth, and those with high levels of earnings regardless of age. Setting contribution rates at the average maximum level allowed by employers and assuming a 4% real return on assets, the lifetime benefit rises from 2% of lifetime consumption for households earning $25,000 per year, to 9.8% for those earning $300,000 per year. Contribution ceilings limit the benefit for high earners and are sensitive to the assumed rate of return.
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