Are Savings Rates Reined by Limits?

A paper explores whether higher limits on 401(k) plan contributions encourage people to save more.

Perhaps people are being reined in from saving as much as they’d like by the current contribution limits on 401(k) plans, if they are even aware of the limits in the first place. “Do Catch-Up Contributions Increase 401(k) Saving?,” from the Center for Retirement Research at Boston College, seeks to explore savings behaviors and how many retirement plan participants in 401(k) plans actually save the maximum amount allowed.

Using the U.S. Census Bureau’s Survey of Income and Program Participation, the researchers explored whether raising 401(k) contribution limits would encourage Americans to save more for retirement. Their analysis scrutinized the effects of the 2001 increase in contribution limits and the introduction of catch-up contributions for those over the age of 50. Current limits are $18,000 and $6,000 for the catch-up contributions. 

Their research found that plan participants under age 50 contributing the maximum increased their contribution by an average of 7%, while those eligible to make catch-up contributions increased their contributions by an average of 14%. 

The numbers suggest it is mostly workers around age 50 who are constrained by the maximum contribution limits, the study pointed out. When permitted to increase contributions by an additional 6.8% starting in 2002, workers age 50 and over increased savings by 3.5%.

The researchers conclude that since only about 10% of participants overall are constrained by the contribution limits, raising the limits would not offer a widespread answer to low savings rates for most retirement plan participants.

“Do Catch-Up Contributions Increase 401(k) Saving?” was written by Qi Guan, Matthew S. Rutledge and Francis M. Vitagliano of the Center for Retirement Research at Boston College, and by April Yanyuan Wu, a researcher at Mathematica Policy Research, a policy research organization.

A link to download the paper is here.