It isn’t tax free, it is tax deferred.

The person who puts money into a retirement fund gets to put off paying the income tax until they withdraw it.

Sometimes the money is withdrawn slowly enough to trigger a lower tax rate that it would have originally.

There is still a benefit to the government as those people are withdrawing the amount they need and are not depending as much on government entitlements.

There are people who die before the money in their retirement fund is depleted. Often, upon their death, the entire amount is triggered as taxable in that year. Often in those cases an even higher tax rate is used.