Bridge over ocean
27 October 2006 Multimedia

The Role of Government in Life-Cycle Saving and Investing

  1. Jeffrey C. Fuhrer
  2. Alicia H. Munnell
  3. John Shoven
  4. Lans Bovenberg

The U.S. government, like governments in virtually all developed countries, supports household saving through social insurance programs and tax incentives. The Social Security system compels people to contribute over their working lives so that they can have a base of income in retirement. This system counterbalances the widespread myopia with regard to retirement income needs and ensures those with the lowest levels of income enough to survive in retirement. For middle and higher-income individuals, the government encourages employer-based group savings through favorable tax provisions accorded pension saving. The tax code allows businesses and individuals to take an immediate deduction for contributions to either a defined benefit or defined contribution plan and does not levy a tax until the monies are paid out in retirement. Finally, it is increasingly evident that home equity will be called upon as a source of income in retirement, and saving through this asset is also highly subsidized under the tax system. Imputed rent is not included in taxable income, but the expenses of owning a home, such as mortgage interest, are deductible. This paper will look at the rationale, costs, and benefits of each component of government support for life-cycle saving.

Please note that text may be difficult to read in this recording. The presentation slides are available for download in the video player.

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