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There are many countries that do not tax money put away for retirement - such as into a 401K. Why does this make sense? It is smart to save for retirement, but what does the govornment gain?

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Economically it makes sense to encourage saving for a pension, as those who don't save will have to be supported entirely from taxation.

Retired people can't work to get money, so they are dependent on their savings or the government. By encouraging saving in a pension, the government hopes to save money in state pensions.

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    To be more precise - the government wants to encourage investments into productive ventures via pension funds. It also helps reduce inflation and thus unlock more leeway for government spending. At the end of the day money is an imaginary concept of zero value - what we really want is future goods and services, which can be improved by making investments today. Commented Nov 21, 2022 at 21:56
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The US does not put money into 401K programs. What the US government does do with 401K programs is to provide deferred taxation on money that goes into those programs (traditional IRAs) or tax-free growth in the case of a Roth IRA. In a sense, that is a subsidy. In another sense, it is anything but a subsidy. The taxes are collected later on traditional IRAs.

The Internal Revenue Service places strict limits regarding how much people can invest in those programs. The goal is to get people in the lower and middle classes to save for their retirement so as to augment the pauper level benefits from Social Security. Those in the upper classes need to invest in non-401K devices to maintain their upper class lifestyle in retirement.

Note that having one million dollars in an IRA on retirement means $40,000 per year (inflation adjusted) per the 4% rule. That's enough to nicely augment those pauper level Social Security benefits, but it is not anywhere close to the level of a wealthy living. Being the millionaire next door does not mean what it used to mean.

Note also that 401K programs go into traditional IRAs rather than Roth IRAs. Both the principal and investment gains are taxed upon withdrawal from a 401K. In a sense, 401K programs are a mechanism by which the US government can indirectly invest in stock markets. (The US government is forbidden by law from directly investing in stock markets.) Since the stock market outperforms bonds in the long term, 401K programs are a long term net winner for the US government.

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  • What do employers gain by matching funds put into a 401K account?
    – Burt
    Commented Nov 21, 2022 at 20:20
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    @Burt The same things they gain by offering other supplemental benefits. Employees in certain career fields expect a certain level of non-cash benefits, such a medical insurance and the like. If an employer doesn't offer these benefits, another one typically will and will out-compete for talent. Not all employers offer these benefits, for things like contracted work, but the cash compensation is typically adjusted to make up for such loss of benefits.
    – Drise
    Commented Nov 21, 2022 at 21:03
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    @Drise Yep. A checklist I have used included: Does this prospective employer do interesting things? Is that interesting work likely to continue? Do they pay well? Do they provide good benefits (insurance, 401K, paid time off, other stuff)? Do they have a good company culture? Is the leadership sane? Are their employees sane? Do they expect me to work an insane number of hours, week-in, week-out? A no on any of those (except the last one) means try the next prospective employer. Interviews are a two-way street. Commented Nov 22, 2022 at 12:46
  • Essentially deferred taxation has two advantages for the taxpayer, the first is it allows them to defer the income until a time when they are probablly in a lower tax bracker. The second and far more important effect is the way it interacts with compounding of interest/profits. Commented Nov 25, 2022 at 17:11
  • The repeated pauper level description of Social Security benefits seems exaggerated. As members of the comfortable middle class, monthly benefits listed on our Social Security statements exceeds current monthly outlays, exclusive of post-secondary education. (Yes, I'm well aware that future payments may not match current statement projections, but that's a subject apart from whether this is pauper level income.) Commented Feb 12, 2023 at 11:59

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