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Will the U.S. Kick 401(k) Subsidies Off the Cliff?

A tax subsidy may be necessary to motivate employers to offer retirement benefits.

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At a time of nearly desperate negotiations to find savings needed to avert the fiscal cliff, ending the taxpayer subsidy–to the tune of $100 billion–of retirement savings accounts seems to many to be a no-brainer.

After all, a comprehensive and authoritative new study estimates that each dollar spent on the subsidy results in just a penny in increased savings. The study by U.S. and Danish researchers looked at Denmark’s retirement system because it is similar to ours and because the Danish government keeps far more detailed data on saving patterns.

Conducted by Harvard economists Raj Chetty, recipient of the MacArthur Foundation’s 2012 genius grant, and John Friedman, together with a team of Danish economists, the study found that only a segment of savers–those who are wealthiest–respond to tax subsidies.

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