Matthew S. Rutledge Research Economist Center for Retirement Research at Boston College 17th Annual Joint Meeting of the Retirement Research Consortium August 6-7, 2015 Washington, DC Do Catch-Up Contributions Increase 401(k) Saving?

Saving is heavily subsidized in U.S. 1 Traditional 401(k) and IRA contributions: Pre-tax. o But subject to payroll tax (short run). o Taxed at withdrawal (long run).  Hence, “401(k) deferrals.” o Tax expenditure on 401(k)s of $62.3 billion in Unclear if 401(k)s increase retirement saving. o Poterba, Venti, Wise (1995): Higher net saving. o Engen, Gale, Scholz (1994): Just reallocation. o Chetty et al. (2014): Most people (Danes) are “passive.”  Even active savers mostly just reallocate.

How can we evaluate 401(k) saving? 2 National roll-out in 1980, so not a great natural experiment. o Some variation at industry or geographic level, but participants may differ in other ways. o Some variation in tax incentive by tax bracket, but only for marginal dollar of saving, and big dataset required. Source of variation: Catch-up contributions. o Starting in 2002, age 50+ have higher 401(k) limit.  2015: $18,000 for age < 50, $24,000 for age 50+. o Previously-constrained have new tax incentive for saving.  Important: Not everyone can afford it.

This paper 3 Joint with April Yanyuan Wu, Francis Vitagliano. How sensitive are high savers to 401(k) tax incentives? Did 401(k) contributions increase due to the catch-up contribution provision? o Triple-differences framework around catch-up adoption. o Uses Survey of Income and Program Participation (SIPP) data linked to tax records.

401(k) limits rose above and below age YearNominal limitCatch-up limit Real (2005$) limitReal YoY increase Age < 50Age ≥ 50Age < 50Age ≥ $10,000$0$11, % % ,500011, ,500011, ,0001,00011,94213, ,0002,00012,73714, ,0003,00013,44016, ,0004,00014,00018, (k) Deferral Limits by Age Source: Authors’ calculations from the Internal Revenue Service.

Our contribution 5 First causal analysis of catch-up contributions on 401(k) saving. o Existing studies: Mostly descriptive. Uses admin data on 401(k) saving linked to household survey. o More accurate than household survey alone. o More info on demographics, economic circumstances than in admin data alone. Uses natural experiment to examine responsiveness of savings to tax incentives.

SIPP-SSA linked data 6 SIPP panels. o Demographics, education, kids, net worth, occupation, spouse’s work status, homeownership, region, pensions. Social Security Detailed Earnings Record, o Total earnings, deferred earnings. o Accessed via the SIPP Synthetic Beta. Sample: Workers ages sometime during o Exclude if earning less than 4 quarters of OASI coverage or unable to work due to health condition.

Triple-differences model 7

Identification strategy 8 Short window around Short window around age 50. Max contributors very dissimilar from non-max contributors. But max contributors pre-50 and post-50 are conditionally identical except for catch-up contributions.

About 9 percent of sample ever contributes near the tax-deferred limit. 9 Share of years at ages in NumberPercent Never205, % Near max 1-5 years10, Near max 6-7 years4, Near max all 8 years4, Frequency Contributing Near the Maximum 401(k) Contribution Source: Authors’ calculations from the Survey of Income and Program Participation Completed Data Files,

Max contributors: Greater earnings, net worth, education 10 CharacteristicFull sampleMax contributors Earnings$57,181$162,531 Net worth$199,571$438,849 Male52.6%70.2% Married Ever had children Children ages Children ages Black College degree or more Homeowner Blue collar Number of observations156,42312,406 Summary Statistics for Full Sample and Participants Ever Near Maximum Source: Authors’ calculations from the Survey of Income and Program Participation Completed Data Files,

11 Post-2002, deferrals among max contributors grow faster after age 50. Average Deferred Earnings by Age Among Workers Who Are Ever Near the Maximum Source: Authors’ calculations from the Survey of Income and Program Participation Completed Data Files,

12 Catch-up-eligible max contributors deferred $543 more than younger max contributors. Triple-Differences Regression Results Dependent variableDeferred amount Mean of the dependent variable Year ≥ *** Age * Ever previously at 401(k) limit5604.6*** (Age 50+) × (Year ≥ 2002)-11.4 (Age 50+) × (At limit)-460.5* (At limit) × (Year ≥ 2002)917.1*** (Age 50+) × (Year ≥ 2002) × (At limit)543.3* Number of observations86,830 Note: *** p<0.01, * p<0.10. Source: Authors’ estimates from the Survey of Income and Program Participation Completed Data Files,

13 Predicted Increase in 401(k) Contributions from to , 2005 $ a For simplicity, the figure does not depict the impact of the (Year)(Age) interaction. This interaction reduces the predicted total increase in contributions by $11 for each of the two groups that include individuals age 50 and over. Source: Authors’ estimates from the Survey of Income and Program Participation Completed Data Files ( ). Catch-up-eligible max contributors deferred $543 more than younger max contributors.

Calculating the elasticity 14 $543 is 4.6 percent of average real 401(k) limit for age-50- plus. On average, real 401(k) limit is 33 percent higher post-2002 for 50-plus, and 11 percent higher post-2002 for age < 50.  22-percentage-point relative increase for 50-plus Elasticity of 401(k) deferrals with respect to change in the maximum deferral is 4.6/22 = Alternative specifications: o Individual ages: $898 extra, elasticity = 0.30 o Fixed effects: $1,020 extra, elasticity = 0.40

Summary 15 Higher catch-up limit provides a source of variation to test sensitivity of 401(k) deferrals to tax incentives. Max contributors age 50-plus defer an additional $540-$1,020 more than max contributors slightly younger than 50. The implied elasticity of 401(k) saving with respect to tax- deferred limit is

Conclusion 16 High-contributing 401(k) participants are sensitive to tax incentives to save. The study does not address whether: o Overall retirement saving is higher, or if the extra deferrals are simply reallocated from post-tax saving vehicles. o Participants contributing substantially less are as sensitive to tax incentives to save.