Question

3. Rutgers University starts allowing faculty members to deduct after-tax money automatically from their paychecks to be deposited in a pension plan. This pension plan earns the same internet as a regular bank account. Why might people participate in this plan when there are no financial incentives to do so?

Answer 1

Investing the portion of tax paid money in pension plans have following advantages –

1. Inculcates a sense of social security in the person.
2. While investing the funds into bank accounts may earn the same interest, However the money is at the disposal of the person and same may be used inappropriately and for non-productive purposes. The same is safeguarded in pension scheme
3. The money invested in pension plans are more secured than bank deposits as the trustee of money is federal government.
4. Further investing funds in pension schemes have certain tax advantages such as interest on pension scheme is exempt from tax and furthermore tax is exempt on withdrawal of funds for certain specified reasons.