Lower-income workers would be far more likely than higher-income counterparts to reduce their contributions if Congress were to lower or eliminate the tax exclusion for employee contributions for retirement savings plans, according to new findings by the Employee Benefit Research Institute (EBRI) released Wednesday.
EBRI's 2011 Retirement Confidence Survey (RCS) shows that more than three-quarters of full-time workers with household income of $15,000 to $25,000 say that having the ability to deduct their contributions to retirement savings plans is "very important." Fifty-six percent of full-time workers currently saving for retirement say they would reduce the amount they put aside if they were no longer able to deduct retirement savings plan contributions from taxable income.
By comparison, only 22% of full-time workers currently saving for retirement with household incomes of $100,000 or more say they would save less if the tax treatment of their retirement savings plan were reduced or eliminated.
The reactions become even starker as saving amounts grow, EBRI found: 71% of those with less than $1,000 in savings said they would reduce the amount saved if they were no longer allowed to deduct their contributions, compared with about 13% of those with $500,000 or more.
"Our research suggests that that some proposals to modify the exclusion of employee contributions for retirement savings plans from taxable income may have unintended consequences," Jack VanDerhei, EBRI research director and author of the report, said in a statement. "Instead of reducing the contribution levels of those with larger taxable incomes (and hence higher marginal tax rates), the RCS results indicate that workers with low levels of household income would be most likely to cut their contribution—in some cases completely."
Individuals who work for small private organizations and those with relatively low educational levels were found to be most likely to reduce their contributions to retirement savings plans.