« Starbucks to serve beer and wine at some U.S. stores | Main | Why it's so tough to be a decent investor »

January 24, 2022

Lower-income workers should join workplace pension plans: report

Economists frequently assume that employees “pay for” employer-provided fringe benefits, such as contributions to retirement plans, in the form of reduced wages.

Wages and fringe benefits are generally perfect substitutes, so that an additional dollar of wages should substitute for an additional dollar of fringe benefits and vice versa.

But that's not necessarily true, says tax analyst Eric Toder in a recent brief.

While higher-income workers clearly benefit from such programs -- they face higher tax rates than low earners during their working years, so the tax deferral is more valuable, and are more likely to drop into a lower tax bracket at retirement than low earners who are already there. That doesn't mean lower-income workers shouldn't sneer at such plans, however.

Because low-income employees receive little tax benefit from saving in employer-provided retirement plans and may prefer cash in hand to additional retirement savings, they could actually end up short changing themselves, he says.

Employer contributions may actually increase their total compensation and they would be better off signing up when there's a matching program in place.

If there's a plan at your work, do you participate? Does your employer match? Did your wage level affect your decision to join in any way?

By Gordon Powers, MSN Money



Post a comment


Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...