Analysis of the Biden Proposal to Equalize Saving Incentives

Abstract

Democratic Presidential Nominee Joe Biden has proposed replacing the current tax deductions on contributions to 401(k) retirement accounts with a uniform refundable tax credit that would be deposited into the taxpayer’s retirement account as a matching contribution. The stated goal of the tax credit is to give lower income workers added incentives to save for retirement, as it would be more generous to them than the current deductions allowed to 401(k) accounts. In PERC Policy Study 2003, authors Dennis W. Jansen, Liqun Liu and Andrew J. Rettenmaier estimate different savings scenarios of both low and high income workers nearing retirement, and compare earnings derived using current 401(k) and Roth savings plans to the proposed uniform tax credit. The authors find that, if enacted, lower income workers would use the tax credit, while higher income workers would switch to Roth savings plans, resulting in less tax revenue for the federal government. The plan would also result in the unequal treatment of workers who participate in defined contribution plans relative to workers in defined benefit pension plans.