Most women need to save more

Twenty years ago, I turned 25 and earned my first raise. My older sister gave me some great advice: “When you get a raise always put some extra money into savings. Make it a habit. You’ll never miss it.” I turned into a saver, thanks to my sister.

Yet, the average 45-year-old woman is not saving nearly enough for retirement. According to a report by Financial Finesse, a financial services company, if she maintains her saving pattern and wants to retire in 20 years with 70 percent of her current income, she could be short by about $268,000.

In part it’s because she’s likely to spend time out of the paid workforce caring for others. And she’s living longer. A new report by the financial services firm Vanguard shows that women tend to save at higher rates than men, and are more likely to participate in their employer’s tax-advantaged 401(k) plan, but they save less.

Could tax subsidies increase the amount women save? Does a tax-advantaged account, such as a 403(b), 401(k), or IRA, make much difference?

We don’t have great data on savings behavior in the US. But in 2013, Harvard’s Raj Chetty and John Friedman, together with Danish researchers Søren Leth-Petersen, Tore Olsen, and Torben Heien, studied 41 million observations on savings for the population of Denmark. They found that tax subsidies, when available, do little to encourage people to increase total savings. In 2009, my Tax Policy Center colleague Eric Toder reached similar conclusions, though without the benefit of Chetty’s data.

Chetty and his colleagues identified two kinds of savers. About 15 percent of Danes, generally high-income people, are active savers who often take advantage of tax incentives by shifting funds from taxable to tax-free accounts, but don’t add to total savings. By contrast, 85 percent of Danes were passive savers who paid little attention to tax subsidies. But when required to contribute to a retirement plan, they’d cut their spending to do so. Of course, Danes are not Americans, and Denmark and the US don’t have identical tax laws.

I wondered what motivates American women to save so, with the help of Facebook, I asked 272 women friends, “Do you consider the tax consequences of saving for retirement?” Amazingly, 39 responded—ranging in age from their thirties to sixties, some married, some single, some with children, some without.

One woman answered, “Sort of. But in all honesty I don’t think of my retirement savings as real money. Otherwise, I’ll spend it at Crate & Barrel.” She sounded just like one of Professor Chetty’s passively saving Danes.

Nineteen women said that they do in fact consider the tax consequences of saving. One said her accountant encourages her to put more money each year into her tax-advantaged retirement account. But another said of tax incentives: “We’d save for retirement without them.”

Overall, nineteen women said they do not consider the tax consequences of saving. A few said they don’t make enough to save a sufficient amount for retirement, let alone consider its tax consequences. Another automatically contributes to her pension but not because of a tax incentive—like another passively saving Dane?

Another said, “I contribute a lot to my 401(k)… but no, I don't really think about the taxes. I just fear a) not being able to retire (who knows what will happen in 30 years) and b) dying before I get to enjoy retirement.”

And one friend quipped, “My retirement plan is to die young.” Bad idea.

My profoundly unscientific poll reaches no obvious conclusion about my female friends’ savings behavior: Half think about taxes when they save, half don’t. And I don’t know whether my male friends think about the tax consequences of saving for retirement… but now I’m curious.

Whether for men or women, tax subsidies for retirement savings in the US are inefficient. Christian Weller and Teresa Ghilarducci for the Center for American Progress and The New School find that retirement savings incentives are complex and disproportionately benefit higher-income earners or those with employer-based plans versus IRAs. Worse, they do little for those who need solid retirement savings the most: Lower-income households, communities of color, and single women.

These retirement savings tax breaks aren’t cheap. The Congressional Budget Office estimates that excluding net pension contributions and their earnings will be the second-largest tax expenditure in the federal individual income tax code over the next decade, reaching $1.9 trillion between 2014 and 2023.

So what’s this 45-year-old woman to think? TPC’s Bill Gale and AARP’s  David C. John have suggested a series of policy changes that could help boost savings for low- and moderate-income households. That includes automatic savings plans, which could help African Americans, Latinos, and women.

But from what I can tell, the surest way to increase a woman’s savings is to give her a nice raise… and introduce her to my sister.

This article first appeared at TaxVox.