Abstract
In this paper, we explore the long-run revenue consequences of the tax deferral of contributions to 401(k)-type retirement plans. We use net present value (NPV) calculations to measure the long-run cost of contributions made in 2008. We show that the long-run NPV cost can be dramatically different if measured using relatively short time horizons, depending on assumptions regarding the rate of return on investments, the government's discount rate on future payments, marginal tax rates, and taxpayers' retirement behavior. Finally, we estimate the effect of limiting the maximum total contributions to 401 (k)-type plans to $10,000 and find that even at high rates of return, the NPV cost of the tax expenditure declines at most by $33 billion or 21.1 percent.
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