Publications by Eric Toder for Retirement Policy

Economists frequently assume that employees “pay for” employer-provided fringe benefits, such as contributions to retirement plans, in the form of reduced wages. This paper challenges these assumptions. Because low-income employees receive little tax benefit from saving in qualified retirement plans, they may not be willing to accept a one dollar reduction in their wage in return for an additional dollar contributed to their 401(k) plan. We find that employers reduce wages of high-income workers by 90 to 99 cents for every dollar contributed to a 401(k) plan, but they reduce wages of low-income workers by only 11 to 29 cents.

Economists frequently assume that employees “pay for” employer-provided fringe benefits, such as contributions to retirement plans, in the form of reduced wages. This paper challenges these assumptions. Because low-income employees receive little tax benefit from saving in qualified retirement plans, they may not be willing to accept a one dollar reduction in their wage in return for an additional dollar contributed to their 401(k) plan. We find that employers reduce wages of high-income workers by 90 to 99 cents for every dollar contributed to a 401(k) plan, but they reduce wages of low-income workers by only 11 to 29 cents.

On May 13, 2011, the Social Security Board of Trustees will release an annual report detailing the current and projected financial status of the program, including the level of reserves in the Social Security trust fund. In this video Eric Toder, codirector of the Tax Policy Center, explains what the Social Security trust fund was designed to do, how it's actually used, and what observers will be looking for in the trustees' report.

The value of the tax preference for pensions depends on the marginal tax schedule and on the tax treatment of income from assets held outside a pension account. We find that changes in U.S. tax law, especially the reduction in tax rates on capital gains and dividends, but also the decline in marginal tax rates, have led to sizeable changes in the value of the pension tax preference. On balance the value of the pension tax preference to worker-savers is modestly lower than it was in the mid-1980s and substantially lower than it was in the late 1980s.

The sharp decline in the stock market in 2008 placed the retirement security of many Americans at risk. Although the market has rebounded this year after bottoming out in March 2009, as of mid-October 2009 the S&P 500 Index remained 30 percent below its peak level two years earlier. This brief simulates the impact of the 2008 stock market crash on future retirement savings under alternative scenarios. The results show that by delaying retirement one additional year, many mid- and late-career workers could increase their income at age 67 enough to offset some or all of their stock market losses.

This paper simulates the impact of the 2008 stock market crash on future retirement savings under alternative scenarios. If stocks remain depressed as after the 1974 crash, 20 percent of preboomers born 1941-45 and 22 percent of late boomers born 1961-65 would see their retirement incomes drop 10 percent or more. Working another year would reduce the share of these big losers to 14 percent for late boomers. Because most pre-boomers were already retired, their share of big losers would decline slightly to 19 percent. Delaying retirement would disproportionately benefit low-income people because their additional earnings exceed their stock market losses.

Urban Institute projections suggest the stock market collapse will have small effects on most Americans' retirement incomes. It's estimated that 37 percent of Americans born between 1941 and 1965 owned no stocks when the market crashed in 2008 and that income from assets will account for a small share of retirement income, even for those with stocks. For most retirees, Social Security provides the majority of income. Had Social Security been invested in private accounts with equities, the impact of the crash would have been much larger—positive or negative, depending on one's birth cohort and on future market performance.

The one-third drop in the S&P 500 index between year-end 2007 and 2008 raises concerns about retirement security since Americans now hold more equities through their retirement plans. Those near retirement will fare the worst because they have no time to recoup their losses. Midcareer workers will fare better because they have more time to rebuild their wealth. They may even gain income if they buy stocks at low prices and get above-average rates of return. High-income groups will be the most affected because they are most likely to have financial assets and to be invested in the stock market.

Most advanced countries exempt returns to retirement saving from income tax, but private saving rates are falling and many people are saving too little for retirement. There is a trade-off between the goals of promoting wide participation in retirement saving plans and allowing more choice to employees. In the United States, purely employer funded plans have been replaced by plans that rely more on voluntary employee contributions, while private saving has declined. Two approaches that may promote more retirement saving are refundable tax credits for low-income workers and rules that encourage or require automatic enrollment in retirement saving plans.

This report compares projections of income and assets from the Model of Income in the Near Term (MINT) with data from the Survey of Income and Program Participation (SIPP), the Health and Retirement Study (HRS), the Survey of Consumer Finances (SCF), and the Current Population Survey (CPS). The comparison reveals a fair amount of variability in population characteristics and reported income and assets among these data files. There is no "right" answer, but rather a range of possible answers. For most statistics we compare, MINT's projected values fall between the highest and lowest values among the survey data.

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