Near miss on 401(k) tax grab marks a new low for retirement policy

Republican lawmakers came close to staging a damaging raid on retirement savers this week to pay for a massive tax cut for corporations and the wealthy. Their recklessness brings to mind that old saying – “This is no way to run a railroad.” But in this case, using that expression would be grossly unfair to incompetent railroad managers.

At the 11th hour, Republicans rejected a sharp reduction in the amount workers can contribute tax-deferred to their 401(k) plans. But retirement saving could still be at risk depending on how the looming fight among various business and special interests evolves in the days ahead.

We need to have a thoughtful, national conversation about how to improve retirement saving in this country. Instead, Republicans in Congress are throwing ideas at the wall to see what will stick. Worse yet, the 401(k) idea is no more than an accounting gimmick, with an impact on retirement saving that is uncertain at best.

The motive behind the envisioned 401(k) grab is clear. Republicans must find very large piles of new revenue – and budget cuts – to offset their proposed tax cuts. The nonpartisan Tax Policy Center estimates the cuts will reduce federal revenue by $2.4 trillion over 10 years, with most of the tax relief going to corporations and the wealthiest households.

Tax-deferred retirement saving offers a juicy target. The contributions to 401(k)s are made with pretax dollars, and withdrawals down the road in retirement are taxed as ordinary income. Deferred taxes on 401(k)s, traditional pensions and IRAs are projected to top $1 trillion from 2015 to 2019, according to the nonpartisan Tax Policy Center. The $2,400 cap would push a large portion of that revenue into the 10-year budget window that matters in Washington.

A $2,400 cap would impact savers across the income spectrum. The Employee Benefit Retirement Institute (EBRI) reports that even among low wage workers, a healthy share would be affected by the cap:

The impact on near-retirement workers also is striking:

Learn more in my Reuters Money column this week.

Comments

  1. Tom Simone says:

    The supposed tax break for the middle class that the careless and, I must say, lying Republicans proclaim is in many ways a major attack on the middle class. To champion eliminating the estate tax which affects less than .01% of the populace while threatening to undermine 401(k) provisions, which are the major retirement vehicle for the middle class, is the height of hypocrisy and lying.

    As your article suggests even now, 401(k) status is by no means certain

    And the increase in the national debt to give massive welfare to the wealthiest parts of our society is a national shame. Where are all those Republican “deficit hawks” now?

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