Currently a firm pays 10% of each employee’s salary into a retirement account, r

Question

Currently a firm pays 10% of each employee’s salary into a retirement account, regardless of whether the employee also contributes to the account. The firm is considering changing this system to a 10% match, meaning that the firm will match, up to 10% of each employee’s salary, the employee’s contributes into the account. Some people at the firm think this change will lead employees to save more and therefore to be able to afford to retire, while others at the firm believe this will lead employees to have less retirement savings and therefore be less able to afford to retire. Explain why either point of view could be correct.

Explanation / Answer

Case 1: Encourage more savings

Since firms have stated that they will save only when the employee saves, this will help the savings amount double.

Not only will the firm contribute to savings, the employees will also start increasing their savings. This will be a double effect on the savings.

Case 2: Discourage savings

Since some employees would not be able to save the required amount, due to increasing expenditures or low salary, the firms will also get a chance to deflect on their saving contribution. As a result, the otherwise sure contribution from firms would get reduced and the employee would end up with low savings.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.