Progressivity and Government Incentives to Save

Peter R. Orszag and
Peter R. Orszag Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard
Robert Greenstein

November 24, 2003


As the baby boomer generation nears retirement, policy-makers seem to be increasingly focusing on the nation’s system of tax-preferred retirement savings. The bulk of the policy changes that have been enacted in recent years, however, move the pension system in the wrong direction: They provide disproportionate tax benefits to high-income households who would save adequately for retirement even in the absence of additional tax breaks, while doing little to encourage lower- and moderate-income households to save more. This fundamentally flawed approach should be replaced with a progressive set of pension reforms, which would be more likely to raise national saving and to reduce elderly poverty.

The paper proceeds as follows. First we summarize the shortcomings in the current pension system. Then we discuss the benefits of progressivity in pension reform, explain why recent pension legislation has moved the system in the wrong direction, and examine a progressive set of policy changes to raise pension coverage and accumulation rates for lower and moderate income workers. A brief concluding section summarizes our findings.