Making Maximum Use of Tax-Deferred Retirement Accounts

Janette KawachiKaren E. Smith Eric Toder

WP#2005-19

Abstract

The share of workers who participate in employer-sponsored tax-deferred plans has been growing, but is still only a minority of workers. Most workers do not contribute the maximum amount allowed by law to employer-sponsored plans. Maximum contributors are more prevalent among high-income compared with low-income workers, college graduates compared with those with less education, non-Hispanic whites and others compared with non-Hispanic blacks and Hispanics, and single and married people, compared with those who are widowed or divorced.

The percentage of participants who contribute the maximum to employer-sponsored plans almost doubled between 1990 and 2003, but virtually all the growth in maximum participation came from groups with high shares of maximum contributors in 1990. The share of participants who are large contributors – defined as contributing the aximum or 10 percent of their earnings to plans – also nearly doubled. For large contributors, the growth came from all income and demographic groups, although growth also increased the most (in percentage points) for groups with large shares in 1990.

Holding all other factors constant, we find an upward trend in the share of large contributors among high-earners, but not among low-earners. Shares of both maximum and large contributors are increasing more over time for higher than for lower earning groups. Recent increases in contribution limits can be expected to reduce shares of maximum contributors, but raise relative shares of maximum contributors among high earning and education groups. Increases in contribution limits do little to increase retirement preparedness among lower-income groups.