Tax breaks designed to boost retirement savings may primarily benefit higher earners, leaving middle-class workers behind, according to a report from the National Institute on Retirement Security.

With most Americans receiving less than half of preretirement income from Social Security, many rely on employer-sponsored savings plans and individual retirement accounts to fund their golden years.

Although Congress created tax incentives to encourage savings, the structure of the U.S. tax code and uneven plan participation have skewed those benefits toward higher earners.

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“Our country spends a lot incentivizing retirement savings,” said Dan Doonan, National Institute on Retirement Security’s executive director and co-author of the report. “But workers across the income spectrum are impacted differently in terms of access to workplace plans, and the value they receive from the tax benefits.”  

Indeed, more than half of tax breaks for company retirement plans, such as 401(k) or 403(b) plans and IRAs, go to the top 10% of earners — those making $117,224 or more, according to the report, based on data from 2019.

One of the reasons for unequal tax benefits for retirement savings is our tax structure, explained Tyler Bond, National Institute on Retirement Security’s research manager and report co-author.

Tax brackets show the levies you’ll owe on each dollar of income. But families don’t owe taxes until earnings exceed the standard deduction, which is $12,950 for single taxpayers and $25,900 for married couples filing together in 2022.

For example, if a married couple filing together making $25,000 per year contributes 3% of earnings ($750) to their 401(k) plan, there’s no upfront tax break since their earnings are below the $25,900 standard deduction for 2022.

However, the benefits increase as families start to earn and contribute more. If a family making $150,000 contributes 12% or $18,000 to their 401(k), they may qualify for $3,960 of tax savings.

More than half of married couples filing together have an adjusted gross income below $100,000, Bond said, which means these families are seeing “relatively small” tax savings.

Another issue is workers aren’t participating in employer-sponsored plans at the same level, according to the report.

Unsurprisingly, the top earners are more likely to contribute higher percentages of earnings sooner, allowing more time for compounded growth and greater tax benefits over time, the findings show.

Possible solutions for middle-class savers may include boosts to Social Security or changing tax benefits for retirement savings, the report suggests. One option may be switching write-offs from deduction-based incentives to refundable credits.

“It’s encouraging that policymakers are examining the nation’s retirement savings shortfall,” Doonan said. “But it will be important to really drill down to understand what policy levers can make a difference for the millions of middle-class Americans who are not accumulating adequate retirement savings.”