THE EVEN BETTER DEAL:

Tax-deferred 401(k) plans may be a better deal for low-income workers than economists thought, according to new research by my Tax Policy Center colleague Eric Toder and Urban Institute senior research associate Karen Smith.

While high-income workers may get a bigger tax break from their 401(k)s, they also face a short-term trade-off. That's because their employers tend to offset their contributions to these plans by paying them less in wages. But Eric and Karen found that while lower-wage workers get less of a tax benefit than their higher-paid colleagues, their wages fall by much less for every dollar their employer contributes to their retirement plan.

Until now, economists assumed salaries of low-wage workers fully offset employer payments to their 401(k) plans. But Eric and Karen found that may not be true for lower-wage workers. Thus, while they enjoy both their employer's contribution and a modest tax reduction, their employer doesn't reduce their cash wages to fully offset those benefits. Bottom line: Total pre-tax compensation for low-wage workers who participate in 401(k)s increases while it remains about the same for those making more money, who get all their benefits from tax-savings.

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