Are 401(k)s “A Tax On The Unaware”?

Matthew O'Brien squares the findings of recent research on Danish tax-exempted retirement accounts with the $240 billion annually that the US government loses to 401(k) tax exemptions:

[O]ne penny's worth is exactly how much extra saving a dollar's worth of retirement subsidies produced in Denmark, according to [the study]. In other words, we might be spending $240 billion to get people to save $2.4 billion more.

But don't the trillions of dollars in 401(k) accounts tell a different story? Not necessarily…. Households save where the subsidy is, but don't save more because of the subsidy…. It's mostly the well-off, who have retirement savings to move around, who move their savings to where the subsidies are. The 401(k) doesn't do much if your goal is to get people who don't save much to save more, and it doesn't do this at quite the cost. 

Ray Fisman echoes this point:

In a recent conversation with me, [Romney economic adviser Glenn] Hubbard echoed the study’s sentiments that 401(k)s and IRAs are essentially subsidies to relatively wealthy households that are well-informed enough to take advantage of them. Or, in Hubbard’s words, these types of programs act as “a tax on the unaware.”

The implications for the current moment in fiscal negotiations:

[T]he biggest takeaway from this study may be that we don’t need across-the-board cuts in deductions or exemptions—they’re not all created equally. Some—like savings tax shelters—starve the government of tax revenue without doing much to encourage retirement savings or furthering other policy objectives. Distinguishing which well-meaning programs accomplish their objectives and which ones misfire is a delicate task. 

And a necessary one. The fiscal cliff is as much an opportunity as a crisis. Ridding the code of as many tax expenditures that have simply become encrusted tools of the privileged is a great place to start. Previous Dish coverage here, here and here.