401(k) Catch-up: Help for the Few
Longer lives, eroding Social Security benefits, and rising health care costs – these are just some of the reasons older workers need to save more in their 401(k)s.
To encourage them, Congress in 2001 approved a “catch-up contribution” for workers over age 50. The size of this additional tax-deductible contribution started at $1,000 in 2002 and jumped to $4,000 by 2005 and $5,000 in 2006. (After 2006, it continued to increase, though only at the rate of inflation, and is currently $6,000.)
But the catch-up contribution has not turned into a broad-based solution to Americans’ retirement woes that some proponents had claimed at its passage. According to researchers at the Center for Retirement Research (which supports this blog), it helps only a select group of older workers: those who were already contributing at or near the tax-deductible maximum allowed on their regular 401(k) contributions. It’s a group with higher-than-average incomes and wealth than the typical older worker.
The study examined the impact of the higher contribution limits in 2002 through 2005, comparing the responses of older workers already contributing at or near the maximum to those well below it. Their analysis also accounted for the simultaneous increase in the cap on workers’ regular 401(k) contributions. (This limit jumped from $10,500 in 2001 to $14,000 in 2005 and $15,000 in 2006, after which it increased with inflation, to $18,000 this year.)
The researchers found the responses differed significantly between two types of over-50 workers during the four-year period. Those who were not close to the maximum contributed just $237 more. But older workers already at or near the maximum contributed an additional $1,697 in response to a higher limit – and the catch-up contributions accounted for about one-third of that.
In 2013, the typical 55-64-year-old working household with a 401(k) had just $111,000 in retirement account assets. The catch-up contribution policy, the researchers conclude, “does not offer a broad-based solution for low saving rates in the United States.”
The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.
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