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Washington: Put Your (Retirement) Money Where Your Mouth Is
By Mike McNamee
March 4, 2014
When President Obama announced a new effort to expand access to retirement savings opportunities, ICI was among the first to applaud. The Administration’s “myRA” looks to provide a new option for Americans who want to put money aside for retirement, but who might not have access to a retirement plan through their workplace. These accounts would complement the wide array of investment options already available to these workers.
But creating new opportunities will do little good if Washington limits the very incentives that have created the vibrant retirement savings system we have today. In his newly proposed budget for fiscal 2015, President Obama again is proposing to cap the incentives for retirement savings that have been central to the success of employer-provided retirement plans. ICI research shows that Americans have embraced the opportunity to save for retirement based on the current system, which is designed to provide savings opportunities to all. Yes, Washington needs to try to solve federal debt issues and simplify the tax code—but not at the expense of the retirement security of millions of hard-working Americans.
Misunderstanding Pension Taxation Leads to Misguided Proposals
A basic misunderstanding about how tax incentives for 401(k)s and similar retirement plans work has led to many a misguided and harmful policy proposal. The President’s FY2015 budget contains two such proposals: a limit on the up-front tax benefits for many 401(k) and individual retirement account (IRA) savers, and a cap on the amount Americans can accumulate through the combination of defined benefit (DB) plans, defined contribution (DC) plans, and IRAs. (Just to make things worse, that cap happens to be a moving target from year to year—but more on that later.)
Regardless of income or method of deferral (i.e., DB plan, DC plan, or IRA), all workers receive the same tax treatment: they pay no tax on compensation set aside for retirement until they withdraw the money. Because deferral is not a deduction or an exclusion, everyone pays tax when the funds are distributed. There are no special tax breaks to fix, no loopholes to close. This tax treatment benefits Americans across the income-distribution spectrum and encourages employers to offer—and workers to participate in—retirement plans.
The 28 Percent Cap Would Affect All Income Levels
The first proposal in Obama’s budget would limit the value of tax savings on an individual’s retirement contributions to 28 percent. Limiting tax deferrals for the highest three income brackets (33, 35, and 39.6 percent) would substantially change the tax treatment of retirement contributions and undermine retirement security by reducing incentives for businesses to provide retirement plans. As this post explains, “limiting the up-front benefit of tax-deferred contributions to retirement accounts reduces the benefits of tax deferral, but does so arbitrarily...substantially reducing the tax benefits for those closest to retirement.”
The potential spillover effects could be enormous. If some employees no longer assign as much value to the opportunity to save in employer-sponsored plans, some employers likely will find that the benefits their employees receive no longer justify the expense of offering a plan. Those employers may choose to eliminate their plans, using the savings to increase cash compensation. It is difficult to predict the size of the effect, but if the 28 percent cap or other similar proposals were applied to tax-deferred retirement contributions, this change would undoubtedly reduce the number of employers that voluntarily sponsor a retirement plan.
Impact of a Pension Savings Limit
The Administration’s budget also proposes to cap the total amount a worker could accumulate in the combination of DB plans, DC plans, and IRAs—a cap that could prevent workers from reaching their full retirement savings goals.
Under this proposal, fluctuating interest rates or market returns could temporarily push an individual’s total accumulations over the limit in a given year—forcing the saver to stop saving for some time and restart later. This approach is overly complicated and extremely difficult for businesses and families to track. It would create a “stop and go” system that penalizes workers who take responsibility over the long term to save for retirement.
Americans Support the Current System
Washington should not try to fix a system that isn’t broken. Research shows time and again that the U.S. retirement system is strong and is working for millions of Americans, who overwhelmingly support the incentives that help them to achieve their savings goals.
Of course, we can and should do more to build on the successes of the current system. But that starts with keeping what works—and preserving the benefits of tax deferral for all savers working to build a secure retirement.
Visit our Retirement Resource Center to find out more about ICI research and other useful information about America’s retirement system.
Mike McNamee is Chief Public Communications Officer at ICI.
America’s Retirement System Is Strong
By Sarah Holden
December 18, 2013
One year ago, ICI released its landmark study, The Success of the U.S. Retirement System, a compilation of research from a wide range of sources, which found that the country’s retirement system is fostering economic security in retirement for Americans across all income levels.
ICI’s Guide to Avoiding a Common 401(k) Tax Trap
By Mike McNamee
December 9, 2013
A tax trap for retirement savings is catching many smart people unaware. If allowed to go unchecked, it could harm the retirement savings of millions of Americans. A columnist for the Washington Post was just the latest in a long list of victims.
Yes, DC Follies Hurt Retirement Savers—But Let’s Not Overstate
By Brian Reid
October 10, 2013
“Debt ceiling follies” certainly do put retirement savers and their assets at risk. On that, ICI agrees with a recent Washington Post blog.
Revenue Estimates of Restricting Tax Deferral: It Ain’t Necessarily So
By Peter Brady
September 20, 2013
Fifth in a series of posts about retirement plans and the policy proposals surrounding them.
In previous Viewpoints posts, I explained that retirement contributions are neither tax deductions nor tax exclusions, but rather are tax deferrals. I also explained why, in my opinion, the two most prominent proposals to restrict qualified deferred compensation are flawed (post three and post four).
Tax Reforms Should Not Favor DB Plans over DC Plans
By Peter Brady
September 19, 2013
Fourth in a series of posts about retirement plans and the policy proposals surrounding them.
In The Tax Benefits and Revenue Costs of Tax Deferral and in two previous Viewpoints posts (post one and post two), I explained the benefits that workers get from deferring tax on compensation set aside for retirement.
A ‘Modest’ Proposal That Isn’t: Limiting the Up-Front Benefits of Retirement Contributions
By Peter Brady
September 18, 2013
Third in a series of posts about retirement plans and the policy proposals surrounding them.
Marginal Tax Rates and the Benefits of Tax Deferral
By Peter Brady
September 17, 2013
Second in a series of posts about retirement plans and the policy proposals surrounding them.
In a previous Viewpoints post, I discussed the difference between tax deferral—the tax treatment applied to retirement savings—and tax deductions and exclusions, such as the mortgage interest deduction or the exclusion of employer-paid health insurance premiums from income. The difference is often overlooked or misunderstood, leading to inaccurate analysis and harmful policy proposals.
Retirement Plan Contributions Are Tax-Deferred—Not Tax-Free
By Peter Brady
September 16, 2013
First in a series of posts about retirement plans and the policy proposals surrounding them.
In today’s fiscal and political climate, taxes are never far from politicians’ minds. Whether to achieve comprehensive tax reform or to raise revenue to meet budget deficits, members of Congress are now considering changes to a range of tax code provisions—including those governing retirement policy. Any comprehensive effort to address fiscal policy or tax reform should examine every option, but some discussions of retirement policy have been misguided. The tax treatment of retirement savings—tax deferral— too often has been lumped together with tax deductions (such as the deduction from income of mortgage interest expense) and tax exclusions (such as the exclusion from income of employer-provided health insurance premiums).
CAP Claims About the 401(k) System Are Misguided
By Paul Schott Stevens
September 4, 2013
The concerns of the Center for American Progress about the 401(k) system (covered August 20 in “A Better Way to Save for Retirement?”) are mistaken.
GMM Panelists Discuss Retirement Savings and Financial Education
By Miriam Bridges
May 17, 2013
Americans need greater access to savings vehicles and better financial education to help ensure that they use them effectively, fund industry experts told attendees at the 53rd Annual General Membership Meeting.