401(K) Tax Policy Creates Inequality

February 1, 2015

This policy note shows how the current system of tax deferral for retirement contributions contributes to wealth inequality.

Though well-intentioned, the current system of tax deferral for retirement contributions undermines public policy aimed at strengthening retirement security for all Americans. In fact, it has become a regressive policy that contributes to wealth inequality. This policy note illustrates how two employees who are identical savers and investors in every way except for income receive different rates of return due only to the effects of the tax code. Converting the current system of tax deductions for defined contribution retirement plans to a refundable tax credit would solve this problem and treat all retirement savers the same.

Authors: Teresa Ghilarducci and Adam Hayes
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