Who Benefts from Retirement Saving Incentives in the U.S.? Evidence

on Racial Gaps in Retirement Wealth Accumulation

Taha Choukhmane Jorge Colmenares Cormac O’Dea

Jonathan Rothbaum Lawrence Schmidt

March 2024
Outline

1

2

3

4

5

Introduction

Data

Contribution Gaps

Early Withdrawal Gaps and Liquidity

Cumulative Efect of Subsidies
Disclaimer

This report is released to inform interested parties of ongoing research and to encourage discussion. Any views

expressed on statistical, methodological, technical, or operational issues are those of the authors and not

necessarily those of the U.S. Census Bureau. The data in this paper has been cleared by the Census Bureau’s

Disclosure Review Board release authorization numbers CBDRB-FY22-SEHSD003-001,

CBDRB-FY22-SEHSD003-017, CBDRB-FY22-SEHSD003-033, CBDRB-FY23-SEHSD003-043,

CBDRB-FY23-0494, and CBDRB-FY24-0151.

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration

(SSA) funded as part of the Retirement and Disability Research Consortium through the Michigan Retirement

and Disability Research Center Award RDR18000002. The opinions and conclusions expressed are solely those

of the author(s) and do not represent the opinions or policy of SSA or any agency of the Federal Government.

Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty,

express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of

the contents of this report. Reference herein to any specifc commercial product, process or service by trade

name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement,

recommendation or favoring by the United States Government or any agency thereof.
Introduction

1.5% of U.S. GDP dedicated to encouraging contributions to retirement savings plans

▶ Employers: contribute $180bn to DC plans, largely by ‘matching’ employee contributions

▶ Government: $120bn tax expenditure on DC plans
Introduction

1.5% of U.S. GDP dedicated to encouraging contributions to retirement savings plans

▶ Employers: contribute $180bn to DC plans, largely by ‘matching’ employee contributions

▶ Government: $120bn tax expenditure on DC plans

This institutional design benefts those who can and do save more for retirement
Introduction

1.5% of U.S. GDP dedicated to encouraging contributions to retirement savings plans

▶ Employers: contribute $180bn to DC plans, largely by ‘matching’ employee contributions

▶ Government: $120bn tax expenditure on DC plans

This institutional design benefts those who can and do save more for retirement

We link newly-collected data on employer retirement plan to administrative data to study

the distributional impact of these incentives
Introduction

1.5% of U.S. GDP dedicated to encouraging contributions to retirement savings plans

▶ Employers: contribute $180bn to DC plans, largely by ‘matching’ employee contributions

▶ Government: $120bn tax expenditure on DC plans

This institutional design benefts those who can and do save more for retirement

We link newly-collected data on employer retirement plan to administrative data to study

the distributional impact of these incentives

Focus on diference in take-up by i) race ii) parental background
Introduction

Wealth gaps by race and family background are large & persistent

White-Black wealth ratio ≈ 6-to-1 from 1980 (Oliver-Shapiro, ’89; Derenoncourt et al, ’21)

w/ lack of convergence heavily infuenced by diferences in rates of return

White-Hispanic wealth ratio ≈ 4-to-1 (Sabelhaus et al, ’21)

Wealth & rates of return persistent btwn generations (Charles-Hurst, ’03; Fagereng et al, ’20)
Introduction

Wealth gaps by race and family background are large & persistent

White-Black wealth ratio ≈ 6-to-1 from 1980 (Oliver-Shapiro, ’89; Derenoncourt et al, ’21)

w/ lack of convergence heavily infuenced by diferences in rates of return

White-Hispanic wealth ratio ≈ 4-to-1 (Sabelhaus et al, ’21)

Wealth & rates of return persistent btwn generations (Charles-Hurst, ’03; Fagereng et al, ’20)

Q: How do retirement incentives contribute to

gaps by race these and parental income?

Important channel for wealth inequality:

1. Retirement wealth is households’ 2nd largest asset class (FRB ’22)
Introduction

Wealth gaps by race and family background are large & persistent

White-Black wealth ratio ≈ 6-to-1 from 1980 (Oliver-Shapiro, ’89; Derenoncourt et al, ’21)

w/ lack of convergence heavily infuenced by diferences in rates of return

White-Hispanic wealth ratio ≈ 4-to-1 (Sabelhaus et al, ’21)

Wealth & rates of return persistent btwn generations (Charles-Hurst, ’03; Fagereng et al, ’20)

Q: How do retirement incentives contribute to

gaps by race these and parental income?

Important channel for wealth inequality:

1. Retirement wealth is households’ 2nd largest asset class (FRB ’22)

2. One of best investments going (mean match on frst dollar of saving is over 60 cents)...
Introduction

Wealth gaps by race and family background are large & persistent

White-Black wealth ratio ≈ 6-to-1 from 1980 (Oliver-Shapiro, ’89; Derenoncourt et al, ’21)

w/ lack of convergence heavily infuenced by diferences in rates of return

White-Hispanic wealth ratio ≈ 4-to-1 (Sabelhaus et al, ’21)

Wealth & rates of return persistent btwn generations (Charles-Hurst, ’03; Fagereng et al, ’20)

Q: How do retirement incentives contribute to

gaps by race these and parental income?

Important channel for wealth inequality:

1. Retirement wealth is households’ 2nd largest asset class (FRB ’22)

2. One of best investments going (mean match on frst dollar of saving is over 60 cents)...

3. ... yet many do not take full advantage of this incentive (avg. foregone match ≈ 1.25%)
Main Findings

1. There are large gaps in retirement saving by race and parental income

▶ Black (Hispanic) workers contribute 39% (34%) less than White workers

▶ Workers from Q1 (Q3) of parental income distribution save 46% (30%) less than those in Q5

▶ Diferences in frms account for a third of gaps, income/age explain another third

▶ Even after accounting for a rich set of individual characteristics, sizable gaps remain

▶ Family structure and parental resources account for signifcant share of (residual) racial gaps
Main Findings

1. There are large gaps in retirement saving by race and parental income

▶ Black (Hispanic) workers contribute 39% (34%) less than White workers

▶ Workers from Q1 (Q3) of parental income distribution save 46% (30%) less than those in Q5

▶ Diferences in frms account for a third of gaps, income/age explain another third

▶ Even after accounting for a rich set of individual characteristics, sizable gaps remain

▶ Family structure and parental resources account for signifcant share of (residual) racial gaps

2. Large gaps in early withdrawals highlight likely importance of liquidity demand

▶ Black retirement savers twice as likely as White savers to take an early withdrawal

▶ Similar result holds for respondents from Q1 of parental income distribution

▶ Gaps by race and parental income widen in years with large earnings losses
Main Findings

1. There are large gaps in retirement saving by race and parental income

▶ Black (Hispanic) workers contribute 39% (34%) less than White workers

▶ Workers from Q1 (Q3) of parental income distribution save 46% (30%) less than those in Q5

▶ Diferences in frms account for a third of gaps, income/age explain another third

▶ Even after accounting for a rich set of individual characteristics, sizable gaps remain

▶ Family structure and parental resources account for signifcant share of (residual) racial gaps

2. Large gaps in early withdrawals highlight likely importance of liquidity demand

▶ Black retirement savers twice as likely as White savers to take an early withdrawal

▶ Similar result holds for respondents from Q1 of parental income distribution

▶ Gaps by race and parental income widen in years with large earnings losses

3. Emphasize distributional features of the current institutional design

▶ Budget-neutral changes to retirement plan design can reduce these wealth gaps
Literature

Wealth and Race in the U.S. Oliver & Shapiro (1989), Barsky et al. (2002), Darity & Nicholson (2005),

Ganong et al. (2020), Sabelhaus and Thompson (2021), Viceisza et al. (2022), Derenoncourt et al. (2022)

Highlight importance of interplay b/w saving subsidies & saving patterns for wealth gaps

Wages and Race in the U.S. Altonji & Blank (1999), Bayer & Charles (2018), Chetty et al. (2020)

Measure racial pay diference due to racial saving diferences

Race & Policy Instruments Darity & Myers (1983, 1987), Myers (1995), Ross & Yinger (2002), Kermani &

Wong (2021), Bhutta et al. (2021), Brown (2021), Avenancio-Leon & Howard (2022)

Study of second largest federal tax expenditure – that for DC retirement plans

Intergenerational Wealth Persistence & Rates of Return Chiteji & Hamilton (2002), Charles &

Hurst (2003), Fagereng et al. (2020), Francis and Weller (2022), Fagereng et al. (2023),

Document link between parental resources and rates of return

Retirement plan design Mitchell et al. (2007), Coyne et al. (2022), Briere et al. (2022)

Show distributional importance of interplay b/w liquidity needs and match take-up
Outline

1 Introduction

2

3

Data

Contribution Gaps

4 Early Withdrawal Gaps and Liquidity

5 Cumulative Efect of Subsidies
Data: Primary sample contains

Survey and administrative employee data on earnings and retirement saving decisions

New employer data on retirement plan characteristics
Data: Primary sample contains

Survey and administrative employee data on earnings and retirement saving decisions

▶ American Community Survey, 2001-2019: Race, education, location, occupation

New employer data on retirement plan characteristics
Data: Primary sample contains

Survey and administrative employee data on earnings and retirement saving decisions

▶ American Community Survey, 2001-2019: Race, education, location, occupation

▶ Tax data, 2005-2020: Taxable earnings, deferred compensation, early withdrawals

New employer data on retirement plan characteristics
Handcode the details in 6,000 plans (the largest 5,000 and a random sample of 1,000 of the

remainder) ....

Data: Primary sample contains

Survey and administrative employee data on earnings and retirement saving decisions

▶ American Community Survey, 2001-2019: Race, education, location, occupation

▶ Tax data, 2005-2020: Taxable earnings, deferred compensation, early withdrawals

New employer data on retirement plan characteristics

▶ Firms must submit narrative descriptions of their retirement plans with regulatory Form 5500

▶ Codifed these for other work (Choukkhmane, Goodman, O’Dea 2023)
Form 5500 has narrative descriptions of:

• Eligibility

• Matching schedule

• Vesting schedule

• Auto-features
Form 5500 has narrative descriptions of:

• Eligibility

• Matching schedule

• Vesting schedule

• Auto-features
Form 5500 has narrative descriptions of:

• Eligibility

• Matching schedule

• Vesting schedule

• Auto-features
Form 5500 has narrative descriptions of:

• Eligibility

• Matching schedule

• Vesting schedule

• Auto-features
Matching Schedules
Data: Primary sample contains

Survey and administrative employee data on earnings and retirement saving decisions

▶ American Community Survey, 2001-2019: Race, education, location, occupation

▶ Tax data, 2005-2020: Taxable earnings, deferred compensation, early withdrawals

New employer data on retirement plan characteristics

▶ Firms must submit narrative descriptions of their retirement plans with regulatory Form 5500

▶ Codifed these for other work (Choukkhmane, Goodman, O’Dea 2023)

▶ We codifed these for the largest 5,000 U.S. DC plans over the period 2003-2018

▶ Matching schedules, vesting schedules, auto features, etc... More details
Parent Characteristics Sample

We’ve known for a long time that the rich save more (Dynan, Skinner & Zeldes 2004)

What about the kids of the rich?

Why might parental income be a driver of saving in this illiquid form?

▶ Richer parents insure their kids’ shocks? (Fagereng et al. (2023))

▶ Evidence that kids of poorer parents use retirement accounts to insure their parents (Francis

and Weller (2022))
Parent Characteristics Sample

We’ve known for a long time that the rich save more (Dynan, Skinner & Zeldes 2004)

What about the kids of the rich?

Why might parental income be a driver of saving in this illiquid form?

▶ Richer parents insure their kids’ shocks? (Fagereng et al. (2023))

▶ Evidence that kids of poorer parents use retirement accounts to insure their parents (Francis

and Weller (2022))

Restrict primary sample to individuals under 42 in 2020

Link to parents in 1040s from 1994, 1995, 1998-2020

✦ Find sample individuals when declared as dependents at 16 (or as close as possible)

✦ AGI in linked child year

✦ W-2 earnings and deferred compensation from 2005-2020
Outline

1

2

Introduction

Data

3 Contribution Gaps

4 Early Withdrawal Gaps and Liquidity

5 Cumulative Efect of Subsidies
Key Contribution Gap Results

1. Gaps in retirement contributions by race and parental income are large

2. Employer matching contributions amplify the efect on wealth of these gaps

3. Around one third of each gap can be explained by diferences across frms

4. Another one third of each gap can be explained by diferences in age and income

5. Gaps remain after accounting for role of rich set of characteristics

6. Household structure and parental income controls further attenuate racial savings gaps
Key Contribution Gap Results

1. Gaps in retirement contributions by race and parental income are large

2. Employer matching contributions amplify the efect on wealth of these gaps

3. Around one third of each gap can be explained by diferences across frms

4. Another one third of each gap can be explained by diferences in age and income

5. Gaps remain after accounting for role of rich set of characteristics

6. Household structure and parental income controls further attenuate racial savings gaps
1. Gaps in saving by race and parental income are large

(a) Average DC Contrib. Rate, by race (b) Average DC Contrib. Rate, by parental income

Employee Employee

Employee 2.4% 2.6%

4.2%

0

1

2

3

4

5

6

7 Average contribution rate (p.p.) White Black Hispanic

White (W) Black (B) Hispanic (H)

Employee

Employee 3.9% Employee 2.0% 2.6%

0

1

2

3

4

5

6

7 Average contribution rate (p.p.)

Q5 Q3 Q1

Q5 Q3 Q1
Key Contribution Gap Results

1. Gaps in retirement contributions by race and parental income are large

2. Employer matching contributions amplify the efect on wealth of these gaps

3. Around one third of each gap can be explained by diferences across frms

4. Another one third of each gap can be explained by diferences in age and income

5. Gaps remain after accounting for role of rich set of characteristics

6. Household structure and parental income controls further attenuate racial savings gaps
2. Employer matching amplifes gaps

(a) Average Employee + Match DC Contrib. (b) Average Employee + Match DC Contrib.

Rate, by race Rate, by parental income

Employee Employee

Employee

Employer Employer

Employer 2.4% 2.6%

4.2%

1.4% 1.5%

2.1%

0

1

2

3

4

5

6

7 Average contribution rate (p.p.) White Black Hispanic

White (W) Black (B) Hispanic (H)

Employee

Employee Employee

Employer

Employer

Employer 3.9%

2.0% 2.6%

2.1%

1.3%

1.6%

0

1

2

3

4

5

6

7 Average contribution rate (p.p.)

Q5 Q3 Q1

Q5 Q3 Q1
Implication: Gaps in Employer Matching Compensation are

Larger than Gaps in Labor Earnings

(a) Income and matching gaps by race (b) Income and matching gaps by parental income $0.65 $0.70

$0.45 $0.50

0

.2

.4

.6

.8

1 Normalized to $1 for the median White level

 Labor income Employer matching benefits 

White (W) Black (B) Hispanic (H) $0.68

$0.55

$0.48

$0.30

0

.2

.4

.6

.8

1 Normalized to $1 for the median Parental AGI Q5 level

 Labor income Employer matching benefits 

Q5 Q3 Q1

Sample: workers around the median of the group-specifc labor earnings distribution in frms

with matching data available.
Key Contribution Gap Results

1. Gaps in retirement contributions by race and parental income are large

2. Employer matching contributions amplify the efect on wealth of these gaps

3. Around one third of each gap can be explained by diferences across frms

4. Another one third of each gap can be explained by diferences in age and income

5. Gaps remain after accounting for role of rich set of characteristics

6. Household structure and parental income controls further attenuate racial savings gaps
3. Around one third of the gap explained by difs across frms

(a) Employee Contrib. Rate, by race (b) Employee Contrib. Rate, by parent income -31%

-43% -43%

-22%

-37% -37%

-3

-2

-1

0 Contribution rate diff. (p.p.)

 (i) Raw(ii) + Year(iii) + EIN

Black Hispanic 95% CI

-50%

-29%

-50%

-33%

-20%

-33%

-3

-2

-1

0 Contribution rate diff. (p.p.)

 (i) Raw(ii) + Year(iii) + EIN

Q1 Q3 95% CI

EIN FE ⇒ comparing coworkers at same frm, match incentives held constant
3. Around one third of the gap explained by difs across frms

(a) Employee + Match Contrib. Rate, (b) Employee + Match Contrib. Rate,

by race by parent income -28%

-39% -39%

-19%

-34% -34%

-3

-2

-1

0 Contribution rate diff. (p.p.)

 (i) Raw(ii) + Year(iii) + EIN

Black Hispanic 95% CI

-26%

-46% -47%

-30%

-18%

-30%

-3

-2

-1

0 Contribution rate diff. (p.p.)

 (i) Raw(ii) + Year(iii) + EIN

Q1 Q3 95% CI

Lighter shading: component coming from employer match
Key Contribution Gap Results

1. Gaps in retirement contributions by race and parental income are large

2. Employer matching contributions amplify the efect on wealth of these gaps

3. Around one third of each gap can be explained by diferences across frms

4. Another one third of each gap can be explained by diferences in age and income

5. Gaps remain after accounting for role of rich set of characteristics

6. Household structure and parental income controls further attenuate racial savings gaps
4. Another ≈1/3 of the gap explained by difs in age and income

(a) Employee Contrib. Rate, by race (b) Employee Contrib. Rate, by parent income -18%

-31%

-43%

-28%

-43%

-11%

-22%

-37%

-18%

-37%

-3

-2

-1

0 Contribution rate diff. (p.p.)

(i) Raw(ii) + Year(iii) + EIN(iv)

+ Age/Gender

(v) + Income Black Hispanic 95% CI

-29%

-18%

-50%

-29%

-50%

-33%

-20%

-33%

-20%

-13%

-3

-2

-1

0 Contribution rate diff. (p.p.)

(i) Raw(ii) + Year(iii) + EIN(iv)

+ Age/Gender

(v) + Income Q1 Q3 95% CI

Intensive and Extensive, Race Intensive and Extensive, Parent
4. Another ≈1/3 of the gap explained by difs in age and income

(a) Employee + Match Contrib. Rate, (b) Employee + Match Contrib. Rate,

by race by parent income -28%

-39%

-16%

-39%

-25%

-10%

-19%

-34% -34%

-16%

-3

-2

-1

0 Contribution rate diff. (p.p.)

(i) Raw(ii) + Year(iii) + EIN(iv)

+ Age/Gender

(v) + Income Black Hispanic 95% CI

-26% -27%

-47%

-16%

-46%

-18%

-30%

-18%

-30%

-11%

-3

-2

-1

0 Contribution rate diff. (p.p.)

(i) Raw(ii) + Year(iii) + EIN(iv)

+ Age/Gender

(v) + Income Q1 Q3 95% CI

Intensive and Extensive, Race Intensive and Extensive, Parent
Key Contribution Gap Results

1. Gaps in retirement contributions by race and parental income are large

2. Employer matching contributions amplify the efect on wealth of these gaps

3. Around one third of each gap can be explained by diferences across frms

4. Another one third of each gap can be explained by diferences in age and income

5. Gaps remain after accounting for role of rich set of characteristics

6. Household structure and parental income controls further attenuate racial savings gaps
5. Gaps remain after controlling for rich set of characteristics -16%

-28%

-39%

-14% -14%

-39%

-16%

-25%

-15%

-19%

-10%

-16%

-34% -34%

-10% -8% -7% -7%

-3

-2

-1

0 Contribution rate diff. (p.p.)

(i) Raw(ii) + Year(iii) + EIN(iv) + Age/Gender(v) + Income(vi) + Educ(vii) + Tenure(viii) + Occupation(ix) + County Black Hispanic 95% CI
5. Gaps remain after controlling for rich set of characteristics -13%

-26%

-13% -13%

-47%

-16%

-46%

-27%

-16%

-30%

-9% -9%

-30%

-11%

-18%

-9%

-18%

-11%

-3

-2

-1

0 Contribution rate diff. (p.p.)

(i) Raw(ii) + Year(iii) + EIN(iv) + Age/Gender(v) + Income(vi) + Educ(vii) + Tenure(viii) + Occupation(ix) + County Q1 Q3 95% CI
Key Contribution Gap Results

1. Gaps in retirement contributions by race and parental income are large

2. Employer matching contributions amplify the efect on wealth of these gaps

3. Around one third of each gap can be explained by diferences across frms

4. Another one third of each gap can be explained by diferences in age and income

5. Gaps remain after accounting for role of rich set of characteristics

6. Household structure and parental income controls further attenuate racial savings gaps
Race and parental income are strongly correlated

Figure: Diferences by race in average parental income, given own income 0

50000

100000

150000

200000 Average Parental AGI (in 2017 USD) 1 2 3 4 5 6 7 8 9 10 Own Income Decile White Black Hispanic
Household and parental income controls further attenuate

savings gaps by race 14%

12%

9%

8%

7%

4%

0

-.2

-.4

-.6

-.8

-1 Contribution rate diff. (p.p.)

Indiv. Charac. + HH Charac. + Parent Income Black Hispanic 95% CI
Outline

1

2

3

Introduction

Data

Contribution Gaps

4 Early Withdrawal Gaps and Liquidity

5 Cumulative Efect of Subsidies
The role of liquidity constraints

Early withdrawals are often penalized ...

▶ Tax penalties

▶ Six-month suspension (rule rescinded in 2020)
The role of liquidity constraints

Early withdrawals are often penalized ...

▶ Tax penalties

▶ Six-month suspension (rule rescinded in 2020)

Penalized withdrawals reveal a preference for liquidity
The role of liquidity constraints

Early withdrawals are often penalized ...

▶ Tax penalties

▶ Six-month suspension (rule rescinded in 2020)

Penalized withdrawals reveal a preference for liquidity

Early withdrawals are very common: Coyne et al. (2022): 10% aged 40-59 take a

penalized withdrawal in a given year
The role of liquidity constraints

Early withdrawals are often penalized ...

▶ Tax penalties

▶ Six-month suspension (rule rescinded in 2020)

Penalized withdrawals reveal a preference for liquidity

Early withdrawals are very common: Coyne et al. (2022): 10% aged 40-59 take a

penalized withdrawal in a given year

Note in following, we do not know whether withdrawals were penalized

▶ Unpenalized hardship withdrawals permitted in limited circumstances
The role of liquidity constraints

Probability of Early Withdrawal (%), by race and parental income

(a) Early withdrawal rates, by race (b) Early withdrawal rates, by parent income 84%

89%

76%

85%

90%

66%

78%

7%

19% 16% 18%

12%

18%

10%

0

5

10

15 Percent probability of early withdrawal

 Raw + Year + EIN + Age/Gender + Income + Indiv. + HH Black Hispanic 95% CI 80% 81%

38%

53%

31%

65% 64%

37% 38%

11%

27%

13% 19%

27%

0

5

10

15 Percent probability of early withdrawal

 Raw + Year + EIN + Age/Gender + Income + Indiv. + HH Q1 Q3 95% CI

Dependent variable = 1 if observe a 1099-R withdrawal above $1,000 in year t+1.

Sample is restricted to subset of individuals who contributed at least $1,000 to DC

accounts prior to year t.
The role of liquidity constraints

Probability of Early Withdrawal, by income growth 0

10

20

30

40

50

60 Percent probability of early withdrawal 0 10 20 30 40 50 60 70 80 90 100

Income Growth Bins (Ventiles) White Black Hispanic

Notes: Figure plots the fraction of workers, by race and 20 ventile bins formed on

contemporaneous arc W2 income growth rates from year t to t + 1. Sample is restricted

to subset of individuals who contributed at least $1,000 to DC accounts prior to year t.

All racial groups much more

likely to take early withdrawals in

years w/ large income declines

Black-White gaps: sizable

throughout income growth dist.,

especially for those w/

biggest income declines

> 50% of Black workers who

had previously contributed to DC

accounts in bottom ventile take

an early withdrawal
The role of liquidity constraints

Probability of Early Withdrawal, by parental income and own income growth 0

10

20

30

40

50

60 Percent probability of early withdrawal) 0 10 20 30 40 50 60 70 80 90 100

Income Growth Bins (Ventiles) Q1 Q3 Q5
The role of liquidity constraints

Evidence from early withdrawals suggestive of liquidity constraints binding more for Black

Americans than White and Hispanic Americans see also Ganong et al. (2020)

Also fnd large diferences in early withdrawal propensity by parental income
The role of liquidity constraints

Evidence from early withdrawals suggestive of liquidity constraints binding more for Black

Americans than White and Hispanic Americans see also Ganong et al. (2020)

Also fnd large diferences in early withdrawal propensity by parental income

Illiquidity of DC plans may deter participation and lower contribution rates ex-ante,

preventing HHs from capturing lucrative match Briere, Poterba & Szafarz, 2022
The role of liquidity constraints

Evidence from early withdrawals suggestive of liquidity constraints binding more for Black

Americans than White and Hispanic Americans see also Ganong et al. (2020)

Also fnd large diferences in early withdrawal propensity by parental income

Illiquidity of DC plans may deter participation and lower contribution rates ex-ante,

preventing HHs from capturing lucrative match Briere, Poterba & Szafarz, 2022

▶ Access to liquidity can raise take-up of high return investments & perpetuate wealth

inequality by generating persistence in expected returns across generations
The role of liquidity constraints

Evidence from early withdrawals suggestive of liquidity constraints binding more for Black

Americans than White and Hispanic Americans see also Ganong et al. (2020)

Also fnd large diferences in early withdrawal propensity by parental income

Illiquidity of DC plans may deter participation and lower contribution rates ex-ante,

preventing HHs from capturing lucrative match Briere, Poterba & Szafarz, 2022

▶ Access to liquidity can raise take-up of high return investments & perpetuate wealth

inequality by generating persistence in expected returns across generations

▶ Potential gains from simple plan design changes:

⋆ Better loan policies, especially post-separation

(Mitchell, Utkus, & Yang, 2007 ⇒ loans linked w/ ⇑ contribution rates)
Outline

1 Introduction

2 Data

3

4

Contribution Gaps

Early Withdrawal Gaps and Liquidity

5 Cumulative Efect of Subsidies
A Broader Perspective on Distributional Analysis of the

Retirement System

Long tradition of distributional analysis of the retirement systems

(Diamond,’77, Kotlikof et al., ’82; Moser and Olea de Souza ’19)

Regressive subsidies for private saving...

... balanced by progressive social security

& (and in the U.S.) income-based non-discrimination testing
A Broader Perspective on Distributional Analysis of the

Retirement System

Long tradition of distributional analysis of the retirement systems

(Diamond,’77, Kotlikof et al., ’82; Moser and Olea de Souza ’19)

Regressive subsidies for private saving...

... balanced by progressive social security

& (and in the U.S.) income-based non-discrimination testing

Problem: focus only on income may miss important distributional aspects
A Broader Perspective on Distributional Analysis of the

Retirement System

Long tradition of distributional analysis of the retirement systems

(Diamond,’77, Kotlikof et al., ’82; Moser and Olea de Souza ’19)

Regressive subsidies for private saving...

... balanced by progressive social security

& (and in the U.S.) income-based non-discrimination testing

Problem: focus only on income may miss important distributional aspects

Other dimensions matter for subsidies take-up and are not undone by Social Security
Measurement of cumulative efects

Data covers fows (earnings, contributions, withdrawals) and covers only partial lifecycles

What about cumulative efect over the lifecycle of the system of supports?
Measurement of cumulative efects

Data covers fows (earnings, contributions, withdrawals) and covers only partial lifecycles

What about cumulative efect over the lifecycle of the system of supports?

We build a microsimulation model that can be used to:

▶ Evaluate incidence of preferred taxation of retirement contributions

▶ Consider outcomes under counterfactual settings which de-linked contributions from saving

Key model outputs:

1. DC wealth: Discounted value of after-tax withdrawals

2. Consumption in retirement: discounted value of wealth and SS payments (in paper)
Cumulative efect of subsidies is large: around 40% of DC wealth

0

20

40

60

80

100 Percentage of DC Wealth at Retirement

Q1 Q2 Q3 Q4 D9 D10

EE Contribution ER Subsidy Tax Subsidy Per $ contributed, subsidies ↑ modestly with lifetime earnings

Only modest variation by race and parental income given income
Distributional Incidence of Subsidies, by Race

By Population Quintiles (analogous to controlling for income) 61

77

65

79

74

89

83

93

87

91

79

89

Baseline Top Value

0

20

40

60

80

100 Percent of White Value

Q1 Q2 Q3 Q4 D9 D10

Population Earnings Bin

Black Hispanic
Distributional Incidence of Subsidies, by Parental Income

By Population Quintiles (analogous to controlling for income)

76

81

87

93

86

89 91

95

91 92 94 96

89

92 92

96

86

90 91

95

82 83

89

94

Baseline Top Value

0

20

40

60

80

100 Percent of Top Parent Income Quintile Value

Q1 Q2 Q3 Q4 D9 D10

Population Earnings Bin

1 2 3 4
Counterfactuals

We undertake three counterfactuals:

1. Tax counterfactual: assume all workers get same beneft (as % of lifetime earnings)

2. Match counterfactual: Equalizing employer contributions (as % of salary) across all

employees in each DC plan.

3. Combined counterfactual does both simultaneously
‘Combined’ Counterfactual, By Race

By population quintiles -50

0 50 100 150 Percent of Average Annual Lifetime Earnings

Q1 Q2 Q3 Q4 D9 D10

Population Earnings Bin

White Black Hispanic

By Own-Group Quintiles
‘Combined’ Counterfactual, By Parental Income

By population quintiles -50

0 50 100 150 Percent of Average Annual Lifetime Earnings

Q1 Q2 Q3 Q4 D9 D10

Population Earnings Bin

1 2 3 4 5

By Own-Group Quintiles
Conclusion

Current system is most favorable to workers who are White and/ or have richer parents

▶ Both groups likely to have more access to liquidity
Conclusion

Current system is most favorable to workers who are White and/ or have richer parents

▶ Both groups likely to have more access to liquidity

Often overlooked distributional impact of current DC system

▶ diferences across income groups miss distributional features of system: disparities (after

controlling for income) by race, parents background, family structure, education, etc.

⋆ ”It takes money to make money” Example: gaps by household structure & education
Conclusion

Current system is most favorable to workers who are White and/ or have richer parents

▶ Both groups likely to have more access to liquidity

Often overlooked distributional impact of current DC system

▶ diferences across income groups miss distributional features of system: disparities (after

controlling for income) by race, parents background, family structure, education, etc.

⋆ ”It takes money to make money” Example: gaps by household structure & education

Broader take-aways for the retirement system:

▶ more broadly, distributional analysis should look beyond income

▶ detaching subsidies from contribution amounts may narrow racial and intergenerational DC

wealth gaps – gaps drop by more than one third in combined counterfactual

▶ perhaps benefts from increasing liquidity (changing loan & withdrawal penalty policies)
Combined counterfactual with behavioral response

Assume for each dollar of incentive removed 20c less employer saving done

-150

-100

-50

0

50

100

150

200

20 40 60 80 90 100

Percent of Average Annual Lifetime Earnings

Population Earnings Bin

White, Baseline Black, Baseline Hispanic, Baseline

White, with Response Black, with Response Hispanic, with Response

Back
Intensive and Extensive Margins by Race

Figure: Participation Figure: Contributions for Participators -9%

-3%

-10%

-18% -19%

-20%

-4%

-9% -8%

-21%

-25

-20

-15

-10

-5

0 Contribution rate diff. (p.p.)

(i) Raw(ii) + Year(iii) + EIN(iv)

+ Age/Gender

(v) + Income Black Hispanic 95% CI

-21%

-25%

-19%

-25%

-15%

-17%

-7%

-10%

-13%

-17%

-3

-2

-1

0 Contribution rate diff. (p.p.)

(i) Raw(ii) + Year(iii) + EIN(iv)

+ Age/Gender

(v) + Income Black Hispanic 95% CI

Back Parent Income
Intensive and Extensive Margins by Parent Income

Figure: Participation Figure: Contributions for Participators -27%

-6%

-13% -13%

-27%

-3%

-15%

-7%

-15%

-7%

-25

-20

-15

-10

-5

0 Contribution rate diff. (p.p.)

(i) Raw(ii) + Year(iii) + EIN(iv)

+ Age/Gender

(v) + Income Q1 Q3 95% CI

-19%

-12%

-27% -27%

-18% -18%

-8%

-12%

-18%

-12%

-3

-2

-1

0 Contribution rate diff. (p.p.)

(i) Raw(ii) + Year(iii) + EIN(iv)

+ Age/Gender

(v) + Income Q1 Q3 95% CI

Back Race
Alternative mechanisms that have little impact on racial gaps

Perhaps surprisingly, we found little impact on gaps from the following exercises:

1. Access / generosity of DC plan: given income & other indiv. characteristics ...

▶ ... small diferences in availability of DC plans across racial groups ✗

▶ ... employer FE have little impact on racial contribution gaps ✗
Alternative mechanisms that have little impact on racial gaps

Perhaps surprisingly, we found little impact on gaps from the following exercises:

1. Access / generosity of DC plan: given income & other indiv. characteristics ...

▶ ... small diferences in availability of DC plans across racial groups ✗

▶ ... employer FE have little impact on racial contribution gaps ✗

2. Auto-enrollment matters for level of contributions but does not change size of gaps ✗
Alternative mechanisms that have little impact on racial gaps

Perhaps surprisingly, we found little impact on gaps from the following exercises:

1. Access / generosity of DC plan: given income & other indiv. characteristics ...

▶ ... small diferences in availability of DC plans across racial groups ✗

▶ ... employer FE have little impact on racial contribution gaps ✗

2. Auto-enrollment matters for level of contributions but does not change size of gaps ✗

3. Proxies for fnancial literacy / awareness

▶ Occupation FE ✗

▶ Parental participation in 401(k) ✗
Contribution & Early Withdrawal Gaps by Parent Income Deciles

-4

-3

-2

-1

0

Contribution rate diff. (p.p.)

rel. to Parental Income Decile 10

1 2 3 4 5 6 7 8 9

Parental Income Deciles

Employee + Match Contribution Rate

0

2

4

6

8

10

Percent probability of early withdrawal

rel. to Parental Income Decile 10

1 2 3 4 5 6 7 8 9

Parental Income Deciles

Early withdrawal rate

Raw + Year + EIN

+ Demographics + Income + Other Ind Controls
Also fnd large gaps by education and family structure

(a) Employee + Match Contrib. Rate, by Education (b) Employee + Match Contrib. Rate, by Household composition

-6

-4

-2

0

Contribution rate diff. (p.p.)

rel. to Graduate degree

No HS Graduated HS Graduated College

Education Bins

Raw + Year + EIN

+ Demographics + Income + Other Ind Controls

-4

-3

-2

-1

0

Contribution rate diff. (p.p.)

rel. to Dual, No Kids

Non-filer Single, Kids Single, No Kids Dual, Kids

Household Composition

Raw + Year + EIN

+ Demographics + Income + Other Ind Controls

(c) Early withdrawal rate, by Education (d) Early withdrawal rate, by Household Composition

0

2

4

6

8

Percent probability of early withdrawal

rel. to Graduate degree

No HS Graduated HS Graduated College

Education Bins

Raw + Year + EIN

+ Demographics + Income + Other Ind Controls

0

5

10

15

Percent probability of early withdrawal

rel. to Dual, No Kids

Non-filer Single, Kids Single, No Kids Dual, Kids

Household Composition

Raw + Year + EIN

+ Demographics + Income + Other Ind Controls Back
Cont. of tax and employer match to wealth, by parent inc.

By Group Quintiles

0

100

200

300 Percent of Average Annual Lifetime Earnings

Q1 Q2 Q3 Q4 D9 D10

Group Earnings Bin

ER Subsidy

Tax Subsidy

Back
Contributions of tax and employer match to wealth, by race

By Race Quintiles

0 100 200 300 Percent of Average Annual Lifetime Earnings

Q1 Q2 Q3 Q4 D9 D10

Group Earnings Bin

White ER Subsidy Black ER Subsidy Hispanic ER Subsidy

White Tax Subsidy Black Tax Subsidy Hispanic Tax Subsidy

Back
‘Combined’ Counterfactual, By Race

By race quintiles -50

0 50 100 150 Percent of Average Annual Lifetime Earnings

Q1 Q2 Q3 Q4 D9 D10

Group Earnings Bin

White Black Hispanic

Back
‘Combined’ Counterfactual, By Parental Income

By group quintiles -50

0 50 100 150 Percent of Average Annual Lifetime Earnings

Q1 Q2 Q3 Q4 D9 D10

Group Earnings Bin

1 2 3 4 5

Back