This from Workforce Management’s e-newslettter came through our inbox this week and the first reaction we had was “What? Why?” Take a look:
House Democrats Contemplate Abolishing 401(k) Tax Breaks
Powerful House Democrats are eyeing proposals to overhaul the nation’s $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive. House Education and Labor Committee Chairman George Miller, D-California, and Rep. Jim McDermott, D-Washington, chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute. A plan by Teresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York, contains elements that are being considered. She testified last week before Miller’s Education and Labor Committee on her proposal...
The article goes on to say that 401(k)s could still exist, they just wouldn’t enjoy the tax subsidy any longer … which would eliminate the incentive for employer matching of contributions.
At first hearing, this sounds like adding insult to injury. But wait – Ghilarducci – wasn’t she that author who wrote something recently about saving pensions or something? Maybe there’s more to this. God bless Google, yup, here she is: she’s the author of When I'm Sixty-four: The Plot Against Pensions and the Plan to Save Them.
Her argument in a nutshell: the way we currently subsidize 401(k)s is woefully inefficient. Here’s a quote from an article she wrote for the Economic Policy Institute:
Tax breaks for 401(k)s and other voluntary retirement accounts are skewed to the wealthy because it is easier for them to save, and because they receive bigger tax breaks when they do so. The value of these tax breaks is equal to the investment earnings on the deferred taxes, which in turn depends on the marginal tax rate paid by a household. A wealthy family in a 35% tax bracket gets a tax break three-and-a-half times more valuable than a family in a 10% tax bracket, even if each family contributes the same dollar amount to a 401(k).
As a result, economists at the Urban-Brookings Tax Policy Center have found that 70% of tax subsidies for defined-contribution plans and IRAs go to those in the top 20% of the income distribution and almost half go to the top 10% (Burman et al. 2004)
So for what we spend subsidizing 401(k)s – which disproportionately benefits the wealthiest who would save for retirement anyway – we could be covering many more people, and more securely.
More from the Workforce Management article:
Under Ghilarducci’s plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5 percent of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3 percent a year, adjusted for inflation. The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated... Under the current 401(k) system, investors are charged relatively high retail fees, Ghilarducci said. “I want to spend our nation’s dollar for retirement security better. Everybody would now be covered” if the plan were adopted, Ghilarducci said.
Her proposal, which she calls “Guaranteed Retirement Accounts,” sounds a little like Obama’s health care plan – if you had a retirement plan you liked, you could keep it; if you didn’t, you would contribute to a defined-benefit plan that would be managed by the same folks who manage Social Security (and your money’d be invested safely in government bonds, not the stock market).
Most people are not the growth-chasing risk-takers that the existing 401(k) scheme assumes they are; I bet many people would prefer the safety of this plan over playing the market, even if they didn't get a tax-advantaged employer match. (Some people haven’t even realized that playing the market is what they’ve been doing – until they opened this quarter’s statements, anyway.) And what a great deal for all the people who had no 401(k) at all who’d now be covered!
Also, I’m happy that the proposal doesn’t involve replacing Social Security. In my opinion, Social Security is supposed to be an insurance program, not a retirement savings program, and should remain so. If it needs any changes (which is a debate beyond the scope of this post) those changes needn't be radical. Full disclosure: I was a recipient of Social Security survivor’s benefits after my dad died when I was 16; I most likely would never have finished my undergrad degree without them, and my life would have been very different.
Anyway, interesting that this proposal seemed to just appear out of nowhere and found traction in the House. I’m going to have to get my hands on a copy of Dr. Ghilarducci’s book.
Speaking of interesting thinkers, I am wildly excited about this conference that I’ll be attending at the end of next week. I plan to blog about it while I’m there. If you are anywhere near Amherst, Massachusetts next week and you’re anywhere near as big a fan of Nancy Folbre, Joan Williams, Heather Boushey, and Ellen Galinsky as I am, you must check this out: www.umass.edu/family/womenandwork/index.htm.
Related Stories: | Topics:Ethonomics, Work/Life, work-life, retirement savings, Individual Retirement Accounts, Teresa Ghilarducci, 401Ks, Retirement Planning, Financial Planning |
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Recent Comments | 9 Total
October 28, 2008 at 8:42am by Gretchen Doores
Great post.
I had the same initial response to this proposal, What? Who do they think they are? But after reading through Ghilarducci's proposal it seems, at least on the surface, to make sense and the option to either stay with your current 401(k) or invest in the government's secure retirement plan is equally helpful. I'm starting to think that this might be a better plan than my existing 401(k) which is woefully small at the moment (thanks Wall St).
October 28, 2008 at 11:53am by Roger Moody
"A wealthy family in a 35% tax bracket gets a tax break three-and-a-half times more valuable than a family in a 10% tax bracket, even if each family contributes the same dollar amount to a 401(k)."
This is just more class warfare, the solution... earn more. Don't penalize those doing better or an even better idea... a FLAT TAX!! Wow, what a concept.
And please count me out of another "guaranteed retirement account administered by the Social Security Administration". I'm already not going to see the money I'm paying in SS taxes.
Just another way for congress to use our money for deficit spending!
No thanks!!
October 31, 2008 at 9:37pm by Anne Nolan
Hey, Gretchen and Roger, thanks for reading my blog! I'm new at this and appreciate the comments. Even though I don't agree with Roger's. IMHO, the meme that we're "never going to see the money" we pay in SS taxes is just a propaganda campaign from the people who wanted to gull us into investing that money in the stock market a couple of years back. Are we glad we didn't listen to them? Look, the boomers were non-working dependents back when they were little kids, and in most cases their moms were out of the workforce, too, to raise them, and the economy didn't collapse back then - in fact it enjoyed a lot of growth in those years. We'll get through their retirement years just fine - and it's a temporary problem, they're not immortal. The real problem is Medicare, not Social Security - that's where the seriously scary entitlement numbers come from, and that's why people who want to scare us always lump the two together. We seriously do need health care reform before large numbers of boomers start retiring.
October 31, 2008 at 9:40pm by Anne Nolan
About my promise to blog about the Amherst conference - it was amazing, but I don't have much time to write tonight - early flight home in the morning. Look for a post about it later this weekend. Thanks.
November 5, 2008 at 8:44am by Jeff Jennings
Anne, are you serious? I am having difficulty here knowing where to begin… OK, I am all for the idea to get those folks that are the lower end of the economic scale to save for their own retirement. Great idea there. Now the idea of taking a plan that a large proportion of Americans use to take responsibility to fund their own retirement away, and replace it with a program that is a mere shadow of its former self is a joke. In your blog it was mentioned that the Federal Govt is subsidizing $80 billion in 401k plans. I would like to know what the Govt making in taxing the distributions of those plans of folks that have already retired. No one seems to mention those numbers. It was stated that the wealthy get a larger tax break for their contributions than the poor. Great, lets all pay the same tax rate. You want a progressive tax rate, you get a progressive tax break. You can't have it both ways. You quoted “Most people are not the growth-chasing risk-takers that the existing 401(k) scheme assumes they are” That is a little presumptuous. Sure if I am with in a few years of retirement I would prefer to have a more conservative allocation in my 401k, but if I am in my 20s or 30s and have 30+ years before retirement, I can afford to ride out these rough times to take advantage of the long term growth of the market. To lock someone in their early working years to 3% real growth is just wrong. …and then you have the Social Security Administration run this plan. Please, I think I’ll take Wall Street’s track record over Congress and the Social Security Administration’s. Now this quote just kills me. "So for what we spend subsidizing 401(k)s – which disproportionately benefits the wealthiest who would save for retirement anyway" Yes, the wealthier save for retirement. It is the wise thing to do. I made the right choices. The right sacrifices. Worked my butt off. That's why I am better off than some. Now you want to penalize me because I did the right thing and reward those who slept in, blew off school, partied the butts off instead? Sorry, I will not apologize for me or my families success. You my have noble ideas to see that all are cared for. That's great, I will help feed the hungry, shelter the cold, but quit demanding that those of us who did the right thing to have to pay the same penalty and chain us to those who didn't.
November 7, 2008 at 11:27am by Kevin Kennedy
WHAT!!!!! This idea is totally ridculous. Social Security was a volunary program that became permanent. The money was in a trust fund and the dems decided there was so much money it would be ok to put it into a general fund. Then the dems decided that it would be fine to give money to those that didn't contribute to it....then they borrowed from it and now where are we.... see where I'm going with this.....We don't need goverment managing this! This is just a dem ploy to create more tax revenue so they can spend more of our money and put us further into debt.... do they think we are really that stupid?! Listen, Ghilarducci's can lay it out and candy coat this thing any way.... This is just a savings plan that the goverment benefits from not the person contributing to it. First, making it manditory to contriubute 5% of you income (sounds like a tax scam to me) and the beneiftis $600.00 a year, bad investment. People are afraid of what has been occuring out there... but no need to throw the baby out with the bath water. We'll need to also find out what willh happen to our ss that we've been putting away for years. I promise you this, once they get ahold of this, they will reduce your benefit when you retire... however, you will be required to contribute the same amount you have been while you are still working....Sounds to me like redistribution. How much more socialistic can this get... Wake up America.... K" plan that really isn't a 401K plan any longer. Anyone who is buying into this really needs to reflect h
November 7, 2008 at 11:27am by Kevin Kennedy
WHAT!!!!! This idea is totally ridculous. Social Security was a volunary program that became permanent. The money was in a trust fund and the dems decided there was so much money it would be ok to put it into a general fund. Then the dems decided that it would be fine to give money to those that didn't contribute to it....then they borrowed from it and now where are we.... see where I'm going with this.....We don't need goverment managing this! This is just a dem ploy to create more tax revenue so they can spend more of our money and put us further into debt.... do they think we are really that stupid?! Listen, Ghilarducci's can lay it out and candy coat this thing any way.... This is just a savings plan that the goverment benefits from not the person contributing to it. First, making it manditory to contriubute 5% of you income (sounds like a tax scam to me) and the beneiftis $600.00 a year, bad investment. People are afraid of what has been occuring out there... but no need to throw the baby out with the bath water. We'll need to also find out what willh happen to our ss that we've been putting away for years. I promise you this, once they get ahold of this, they will reduce your benefit when you retire... however, you will be required to contribute the same amount you have been while you are still working....Sounds to me like redistribution. How much more socialistic can this get... Wake up America.... K" plan that really isn't a 401K plan any longer. Anyone who is buying into this really needs to reflect h
November 7, 2008 at 11:33am by Kevin Kennedy
Sorry, for some reason my comments were submitted before I was able to finish and edit.... you get my idea though....