As we discussed last week, the evidence continues to grow that 401(k)s and other defined contribution plans do not provide a secure retirement for working families. Despite this mounting evidence, some have pushed for more contributions to 401(k)-style plans, as if throwing more money at the problem will make it go away. This idea, though, does not address the real source of the retirement savings crisis.
The federal government limits the amount of money individuals can contribute to 401(k) plans and IRAs. Each year, the government announces whether they have raised the cap on these contributions and, if so, by how much. In 2017, an individual can contribute up to $18,000 to a 401(k) plan through their employer and up to $5,500 to an IRA. If that individual is 50 or older, they can make an additional “catch-up” contribution of up to $6,000 to their 401(k) and up to $1,000 to their IRA.
Utah Senator Orrin Hatch, chairman of the Senate Finance Committee, has advocated for increasing or completely eliminating the annual cap on 401(k) contributions. This would allow individuals to contribute significantly more than they are currently contributing toward saving for retirement. Sounds great, right? The problem is, few people are currently contributing the maximum amount each year to their 401(k) or IRA. According to the Center for Retirement Research at Boston College, only 12 percent of participants in 401(k) or IRA plans made the maximum contribution in 2013. However, those numbers are highly skewed. 36 percent of participants who make above $100,000 per year contribute the maximum amount. That drops down to 6 percent for those making between $75,000 and $100,000 per year and only 2 percent for those making between $50,000 and $75,000. Below $50,000 per year, no one contributes the maximum amount.
The argument for raising the contribution caps is that if people could contribute more, they would and then they would be better prepared for retirement. Certainly, some people would contribute more to their 401(k)s or IRAs if they were able, but the evidence suggests that the people who would do that are those with incomes above $100,000 per year. Very few people with incomes below that level are contributing the maximum amount at the current levels. It seems very unlikely that they would suddenly increase their contributions above the current levels just because they would be able to.
The tax incentives for retirement savings are already skewed. Distorting them even more would do nothing to alleviate the looming retirement savings crisis.