House Democrats considering doing WHAT to 401(k)s?

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

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: