The pre-tax income of each person is determined by her talent level and her choice of effort.
He posits that firms are choosing 401(k) plans because only in 401(k) plans do workers make voluntary, pre-tax contributions.
Although it had returned pre-tax profits every year since 1984, these were at too low a level to meet the financial needs of the company.
At t=0, the agent starts work and saves a constant fraction, s, of his pre-tax paycheck, w(t), in a retirement savings account.
If a person does not work, then she has no pre-tax income.
We assume that assets held inside and outside the 401(k) grow at the same pre-tax real rate of return of 3%.
Allowed in 1978, but implemented in 1981, they allow workers to make pre-tax contributions into an account maintained by the employer; employer contributions are discretionary.
The pre-tax solution can be obtained by setting t = 0 in the above expressions.
