A study has found that tax breaks are not necessarily the best inducement for people to save toward their retirement, but that other features of such plans, including several offered by the Thrift Savings Plan, overall are more effective.
The study, conducted for the Brookings Institution, examined savings behavior in tax-favored retirement savings programs that share many features in common with the TSP. It found that the tax advantage to participants of such plans plus similarly tax-favored IRAs is in the range of $100 billion a year.
However, it noted that when individuals receive less of a tax benefit for their retirement saving, they tend to save less in those accounts, but meanwhile tend to save more elsewhere, leaving their total savings basically the same.
"We find that ‘nudges’ such as automatic contributions by employers have much larger effects on savings," the study’s authors wrote. "When individuals switch to firms with higher automatic employer pension contributions, their savings rates increase significantly. Most individuals are passive savers who do not pay attention to employer pension contributions and thus do not offset such contributions by saving less in other accounts."
The TSP since 2010 has featured automatic enrollment for newly hired employees with an opt-out choice (although those hired previously still have to opt in). TSP data show that only about 3 percent of those automatically enrolled opt out, a far smaller percentage than those who failed to opt in under the prior policy. Similarly, all employer contributions for FERS investors begin on hiring; at one time there was a waiting period for matching contributions that could last as long as a year.
