The Impact of State Income Tax Breaks on Savings Behaviors and Income Security in Retirement

• In Event: Financial Security and Well-being in Retirement

Abstract

States have a long history of excluding income distributed from retirement plan accounts from state income tax liabilities. Such tax incentives significantly boosted savings for retirement in states with exemptions (Dao & Collins, 2023). However, these policies could potentially induce workers to retire early as they save enough for retirement. Hence, on net, their incomes in retirement are not higher than their counterparts in states without these exemptions. In this study, we test how retirement income exemptions influenced retirement behaviors to validate our above argument. Using confidential Health and Retirement Data (HRS) data with a staggered Difference-in-Difference approach, we show an 8 percentage points higher propensity to retire earlier and 15 percentage points higher probability to exit the labor force at full retirement age in exemption states. These findings support our argument that state retirement income exemption policies might not work as expected, exacerbating poverty among 65 plus population. 

Author

• Ngoc Dao, Kean University
  Presenting Author