Retirement Savings Tax Breaks Leave Middle Class Households Behind

Prioritizing Policies to Help Middle Class Families Can Help Address the Nation’s Retirement Savings Shortfall  

Webinar on June 2nd to Review Findings

WASHINGTON, D.C., May 26, 2022 – A new report finds that the tax breaks designed to increase Americans’ retirement savings disproportionately benefit high income households and do little to assist middle class families.

More than half of the tax breaks for defined contribution (DC) plans and Individual Retirement Accounts (IRAs) go to those in the top ten percent by income. Also, the top 30 percent of workers by income receive 89 percent of the present value of tax benefits for DC plans and IRAs. This leaves a “missing middle” because the tax code offers meager benefits for these working Americans to save for retirement. At the same time, these middle class workers face rising costs in retirement, often lack retirement plans at their jobs, and need more than just Social Security income in retirement to maintain their standard of living.

These findings are contained in a new research report from the National Institute on Retirement Security (NIRS), The Missing Middle How Tax Incentives For Retirement Savings Leave Middle Class Families Behind. This report documents how current tax incentives fail to promote adequate retirement security for the middle class. It considers the impact of factors including marginal tax rates, retirement plan participation, and income distribution on retirement saving levels. The research also offers potential solutions that could enhance retirement security for middle class families.

Read the research here. Register here for a webinar on Thursday, June 2, 2022, at 2:00 PM ET with a review of the research.

“Saving for retirement is one of the biggest financial challenges facing middle class families,” said Dan Doonan, NIRS executive director. “But the middle class is left behind by the retirement savings system in key ways, including tax incentives.”

“It’s encouraging that policymakers are examining the nation’s retirement savings shortfall. But it will be important to really drill down to understand what policy levers can make a difference for the millions of middle class Americans who are not accumulating adequate retirement savings,” Doonan explained. “For example, policy areas to look at would be strengthening Social Security, increasing access and participation in retirement plans, reforming the deduction-based tax system, and ensuring the tax breaks are directed at generating retirement income. Together, such policy changes could make a real impact ensuring working Americans will have ample income to be self-sufficient and maintain their standard of living in retirement.”

The report’s key findings are as follows:

  • The current retirement saving structure suffers from a missing middle. The progressive nature of the Social Security benefit does much to prevent old-age poverty, but the level of income replacement from Social Security falls off far more quickly than private savings function to provide adequate retirement income for middle class workers.
  • Tax expenditures for various retirement programs are heavily skewed toward high-income earners. Some of this is due to the design of the tax breaks themselves, but outside factors, such as participation in employer-provided retirement plans and having the financial resources to save for retirement, also play a significant role.
  • The value of tax incentives for saving is much greater for those at higher income levels, who face higher marginal tax rates. These incentives are quite weak for much of the middle class. Additionally, those who are able to invest earlier and at higher levels enjoy a greater advantage from the deferral of taxation on investment gains.
  • The tax expenditures for retirement saving, oriented around the defined contribution system, give rise to inequities beyond income and wealth. Geographic and racial inequities related to retirement are both exacerbated by the tax incentives for saving.
  • Solutions to these inequities should focus on increasing participation in the retirement savings system and ensuring working families also receive adequate incentives to save for retirement. Some potential solutions could focus on building upon Social Security, either through benefit changes or allowing the program to integrate lifetime income options for savers. Reforming the tax expenditures themselves, by eliminating the deduction-based system and replacing it with a refundable credit is another possibility. Other solutions could focus on increasing access and participation in savings plans, which some states are doing for workers who lack workplace plans, thereby making it easier to participate. Finally, curbing abuses of the existing system would ensure that the significant sums of federal tax revenue that are dedicated to retirement security are directed at generating retirement income.

The National Institute on Retirement Security is a non-profit, non-partisan organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy as a whole. Located in Washington, D.C., NIRS membership includes financial services firms, employee benefit plans, trade associations, and other retirement service providers. More information is available at Follow NIRS on Twitter @NIRSonline.