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Tax breaks designed to increase pension savings can benefit mostly higher earners, leaving middle-class workers behind, according to a report by the National Pension Security Institute.
Because most Americans receive less than half of their pre-retirement income from Social Security, many rely on employer-sponsored savings plans and individual retirement accounts to fund their golden years.
Although Congress has created tax incentives to encourage savings, the structure of the U.S. tax code and uneven participation in plans have distorted these benefits for higher-income earners.
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“Our country spends a lot to stimulate pension savings,” said Dan Dunan, executive director of the National Institute for Pension Security and co-author of the report. “But workers across the income spectrum are affected differently in terms of access to workplace plans and the value they receive from tax breaks.”
In fact, more than half of the tax breaks for corporate retirement plans, such as plans 401 (k) or 403 (b) and the IRA, go to the top 10% of winners – those who make $ 117,224 or more, according to the report, based on data from 2019
It will be important to really do an analysis to understand what political levers can make a difference for the millions of middle-class Americans who do not accumulate adequate retirement savings.
Dan Dunan
Executive Director of the National Institute for Pension Insurance
Tax structure
One of the reasons for the unequal tax breaks for pension savings is our tax structure, explained Tyler Bond, head of research at the National Institute for Pension Security and co-author of the report.
The tax brackets show the levies you will owe for every dollar of income. But families do not owe taxes until the income exceeds the standard deduction of $ 12,950 for single taxpayers and $ 25,900 for married couples who file together in 2022.
For example, if a married couple who file together, earning $ 25,000 a year, contribute 3% of their income ($ 750) to their 401 (k) plan, there is no advance tax credit because their income is below the standard deduction of $ 25,900 for 2022
However, the benefits increase as families begin to earn and contribute more. If a family earning $ 150,000 contributes 12% or $ 18,000 to their 401 (k), it can qualify for $ 3,960 in tax savings.
More than half of married couples who file together have adjusted gross incomes below $ 100,000, Bond said, meaning those families see “relatively small” tax savings.
Another problem is that workers do not participate in employer-sponsored plans at the same level, according to the report.
Not surprisingly, the best earners are more likely to pay a higher percentage of profits earlier, allowing more time for more complex growth and greater tax breaks over time, the findings show.
Possible solutions for middle-class savings could include raising social security or changing tax breaks for pension savings, the report suggests. One option could be to switch write-offs from deductible incentives to repayable loans.
“It is encouraging that politicians are addressing the nation’s lack of pension savings,” Dunan said. “But it will be important to really make an analysis to see what political levers can make a difference for the millions of middle-class Americans who do not accumulate adequate retirement savings.”
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