Final answer:
Yes, a higher marginal tax rate can provide an advantage in terms of tax savings associated with contributions to a tax-sheltered retirement account. Behavioral responses to these incentives, however, can affect overall savings rates as firms adjust pension contributions and workers consider Social Security benefits.
Step-by-step explanation:
The statement 'the greater your marginal tax rate, the greater the tax savings associated with contributions to a tax-sheltered retirement account' highlights a significant advantage of contributing to retirement accounts such as Individual Retirement Accounts (IRAs) and 401(k) plans. When contributions are made to these accounts, they are typically made with pre-tax dollars, meaning that the money is not taxed in the year it is earned but is taxed upon withdrawal in retirement. The higher an individual's marginal tax rate, the more taxes they would pay on their income, so by contributing to a retirement account, they reduce their taxable income and consequently the taxes paid at that high marginal rate. This leads to a larger 'tax-deferred' benefit where savings grow without being diminished by annual taxes, increasing the effective rate of return on those savings.
However, behavioral responses to tax incentives are complex. For instance, if a firm promises to provide specific pension benefits, a higher rate of return means that it needs to save less currently to meet its future obligations, potentially reducing current savings rates. Additionally, the availability of programs like Social Security may also influence individual saving behaviors, potentially reducing the amount workers save independently because they anticipate government-provided benefits after retirement.