The Impact of Tax Incentive Structure on Taxpayers' Retirement Savings Decisions

We investigate whether and how the structure of retirement savings incentives influences their relative attractiveness to taxpayers, independent of their effect on after-tax returns. To that end, we examine taxpayers' preferences between defined contribution retirement plans with back-loaded (i.e., Roth) and front-loaded (i.e., traditional) tax incentives. In three experiments, we find limited evidence that individuals appropriately weight temporal tax rate changes, the primary factor differentiating after-tax returns across incentive structures, in their plan preferences. In contrast, we find consistent evidence that the incentive structure's relation to taxpayers' broader attitudes and preferences significantly impacts plan preferences. Overall, we find evidence that generally held attitudes and preferences lead to a systematic preference for back-loaded retirement plans, even in situations in which taxpayers know that a back-loaded plan is economically dominated by a front-loaded plan. The results have implications for policymakers and others considering how best to encourage retirement savings.