Does It Pay to Save?

Policy Reports | Taxes

No. 298
Friday, June 01, 2007
by Laurence J. Kotlikoff and David S. Rapson


Does it pay to save?  While the question appears simple, the answer is quite complicated. This is largely due to the complexity of the tax code and the interaction of different government tax and benefit systems that base eligibility on meeting certain income or asset tests.  Income tests often withdraw $1 of benefits for each additional $1 of income above a specified income ceiling.  Asset tests often withdraw all benefits if assets exceed the ceiling by $1.  As a result, saving and wealth accumulation can cost some households thousands of dollars in lost benefits. 

Penalties for saving are particularly severe for young, single-parent and low-income families.  But these are the very households that need the strongest incentives to save for their retirements. 

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