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Research

401(k) Catch-up: Help for the Few

Longer lives, eroding Social Security benefits, and rising health care costs – these are just some of the reasons older workers need to save more in their 401(k)s.

To encourage them, Congress in 2001 approved a “catch-up contribution” for workers over age 50.  The size of this additional tax-deductible contribution started at $1,000 in 2002 and jumped to $4,000 by 2005 and $5,000 in 2006.  (After 2006, it continued to increase, though only at the rate of inflation, and is currently $6,000.)

But the catch-up contribution has not turned into a broad-based solution to Americans’ retirement woes that some proponents had claimed at its passage.  According to researchers at the Center for Retirement Research (which supports this blog), it helps only a select group of older workers: those who were already contributing at or near the tax-deductible maximum allowed on their regular 401(k) contributions. It’s a group with higher-than-average incomes and wealth than the typical older worker.

The study examined the impact of the higher contribution limits in 2002 through 2005, comparing the responses of older workers already contributing at or near the maximum to those well below it.  Their analysis also accounted for the simultaneous increase in the cap on workers’ regular 401(k) contributions.  (This limit jumped from $10,500 in 2001 to $14,000 in 2005 and $15,000 in 2006, after which it increased with inflation, to $18,000 this year.)

The researchers found the responses differed significantly between two types of over-50 workers during the four-year period.  Those who were not close to the maximum contributed just $237 more.  But older workers already at or near the maximum contributed an additional $1,697 in response to a higher limit – and the catch-up contributions accounted for about one-third of that.

In 2013, the typical 55-64-year-old working household with a 401(k) had just $111,000 in retirement account assets.  The catch-up contribution policy, the researchers conclude, “does not offer a broad-based solution for low saving rates in the United States.”

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof. 

6 Responses to 401(k) Catch-up: Help for the Few

  1. brian says:

    I enjoy this blog and find much of the data very relevant. One topic I have not yet seen is related to pension lump sum. Companies seem to keep the actual calculation math very close to the vest. I’ve tried to get more info but always find the response to be ‘generic’ with no real numbers. Is there a way to pry this data loose?

  2. Brian- thanks so much for reading Squared Away! Our goal is to present reliable information people can use.
    Here’s a blog about my own experience with a former employer’s lump-sum offer, “Evaluating a Pension Buyout Offer”:
    http://squaredawayblog.bc.edu/squared-away/evaluating-a-pension-buyout-offer/
    Kim (blog writer)

  3. Ken Pidcock says:

    The fact that the catch-up contribution policy does not offer a broad-based solution for low saving rates doesn’t mean it has no value. I am one of those employees, of whom I imagine there are many in the academic workforce, who didn’t start saving for retirement until relatively late in life. The catch-up contribution policy has been quite valuable to my household. (From the standpoint of public policy, and best use of tax expenditures, I’m sure it would be better if I just increased after tax savings.)

  4. Mike says:

    I’m not sure why the author includes “eroding Social Security benefits” in her first sentence about why people need to save more. That is simply not true. While the discussion of what can or should be changed in Social Security is endless, as far as I know the benefit formula(s) haven’t been changed nor has the index used to calculate inflation.

  5. Mike- thanks for this excellent question, which highlights something many people don’t realize.
    Although Social Security benefits typically have a cost-of-living adjustment every year, which prevents erosion from inflation, benefits are being reduced slowly in an indirect way.
    That’s because the program’s Full Retirement Age – the age at which a worker is eligible for their full, rather than a reduced benefit – is slowly rising. Here’s a chart from the Social Security Administration showing your FRA, depending on the year you’re born:
    http://www.ssa.gov/oact/ProgData/nra.html

    Thanks for reading the blog!
    Kim, blog writer