New analysis from the Employee Benefit Research Instituteindicates lower-income workers are far more likely to say theywould reduce their contributions if the tax exclusion for employeecontributions for retirement savings plans were lowered oreliminated.

"Our research suggests that that some proposals to modify theexclusion of employee contributions for retirement savings plansfrom taxable income may have unintended consequences," saidJack VanDerhei, EBRI research director and author of EBRI'sjust-released 2011 Retirement Confidence Survey. "Instead ofreducing the contribution levels of those with larger taxableincomes (and hence higher marginal tax rates), the RCS resultsindicate that workers with low levels of household income would bemost likely to cut their contribution—in some casescompletely."

Results show that more than three-quarters of full-time workerswith household income of $15,000 to $25,000 say that having theability to deduct their contributions to retirement savings plansis "very important." More than half (56 percent) of full-timeworkers currently saving for retirement say they would reduce theamount they save if they were no longer able to deduct retirementsavings plan contributions from taxable income.

By comparison, only 22 percent of full-time workers currentlysaving for retirement with household incomes of $100,000 or moresay they would save less if the tax treatment of their retirementsavings plan were reduced or eliminated.

The reactions become even starker as saving amounts grow, EBRIfound: 71 percent of those with less than $1,000 in savings saidthey would reduce the amount saved if they were no longer allowedto deduct their contributions, compared with about 13 percent ofthose with $500,000 or more.

Those found to be most likely to reduce their contributions toretirement savings plans were individuals who work for smallprivate organizations as well as those with relatively loweducational levels.

In recent years, proposals have surfaced to reform the 401(k) system based on the assumption thathigher-income individuals receive more tax-related benefits fromthese programs than do individuals in lower marginal tax brackets(as well as those who may pay no federal income taxes in aparticular year). Some of these proposals have includedmodifications of the current federal income taxation treatment thatexcludes some or all of the contributions employees make totax-qualified defined contribution plans.

From a strictly financial perspective, VanDerhei said, it islogical to assume that the lower-income individuals (those mostlikely to pay no or low marginal tax rates and therefore have asmaller financial incentive to deduct retirement savingscontributions from taxable income) would be least likely to ratethe exclusion of employee contributions for retirement savingsplans from taxable income as "very important."

However, the RCS data show that those in the household incomecategory of $15,000 to $25,000 actually have the largest percentageof respondents classifying the tax deductibility of contributionsas very important. While higher-income workers would be themost likely to be negatively affected by a proposal to cut oreliminate the exclusion of employee contributions for retirementsavings plans from taxable income, VanDerhei noted that behavioraleconomics has shown that workers' reaction in similar situationsare often at odds with what would have been logicallypredicted.

The EBRI analysis notes that determining the overall taxadvantage of making before-tax contributions to a 401(k) planinvolves the prediction of several factors, including amounts andtiming of contributions, marginal tax rates during the accumulationand decumulation periods, rates of return, and withdrawal behaviorduring the decumulation period.

Among the report's other findings:

Results by savings level: Of thefull-time workers who are currently saving for retirement whoreport that they currently have less than $1,000, 71.3 percentindicate they would reduce the amount saved. This value declines to38.8 percent for those with savings of $1,000 to less than$10,000.

Results by education level: Approximately 32.2 percent of high school graduates indicatethey would reduce savings, whereas only 22.1 percent of those witha graduate or professional degree have a similar response.

Full results of the report are in the March 2011 EBRINotes, "The Impact of Modifying the Exclusion of EmployeeContributions for Retirement Savings Plans from Taxable Income:Results from the 2011 Retirement Confidence Survey," online atwww.ebri.org