The Impact of Tax Incentive Structure on Taxpayers' Retirement Savings Decisions

• In Event: 2.04 Behavioral Tax Research

Abstract

Understanding the potential impact of tax incentives on individual retirement savings requires an understanding of how individuals make savings decisions. To that end, we examine taxpayers’ choices between defined contribution retirement plans with differentially structured tax incentives (i.e., front-loaded and back-loaded incentives). We conduct three experiments examining the impact of economic factors that normatively drive plan choice as well as non-economic attitudes and preferences that may also influence plan preferences. We find mixed evidence regarding whether individuals appropriately weight temporal tax rate changes in their plan choice, despite the fact that these tax rate changes are the primary factor driving the relative after-tax returns of front- versus back-loaded plans. In contrast, we find consistent evidence that plan attributes related to taxpayers’ non-economic attitudes and preferences consistently influence plan choice. Finally, we find that taxpayers prefer back-loaded retirement plans, even in situations in which a back-loaded plan is economically dominated by a front-loaded plan.

Authors

• Andrew D Cuccia, University of Oklahoma

• Marcus M. Doxey, University of Alabama-Tuscaloosa

• Shane Ryan Stinson, University of Alabama-Tuscaloosa