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The federal government should stop allowing pre-tax contributions to retirement savings and eliminate 401(k)s and individual retirement accounts, two economists from opposing ideological camps argue in a January research paper. did.
They said allowing people to shelter their retirement funds from taxes is a policy that primarily benefits the wealthy. Congress could use that money, about $200 billion a year in lost tax dollars, to shore up underfunded Social Security programs.
Their proposal was controversial. One social media posts It has been viewed over 700,000 times.
“I don’t think this subsidy can be rationalized only if it increases savings…I don’t think it increases savings very much,” said Alicia Munnell, who served as assistant secretary of the Treasury under President Clinton. She co-authored the brief with Andrew Biggs, a senior fellow at the right-wing American Enterprise Institute.
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The Employee Retirement System and its personal savings counterpart, Individual Retirement Accounts, were created to help Americans save for retirement.
But federal data suggests that tax-advantaged retirement accounts only help some Americans, especially the wealthy.
The median retirement account value for households in the top 10% of earners was $559,000 in 2022, according to the Consumer Finance Survey. An overwhelming 93% of those households had a retirement plan.
For middle-income Americans in the 40th to 60th percentile of income, the median retirement plan value was just $39,000, and nearly half of that group had no retirement savings.
Many small employers do not offer 401(k) plans. Even if they do, workers may be hesitant to participate because they’re worried they won’t be able to spare the income or that they’ll incur tax penalties if they withdraw it later.
“Many workers’ incomes are highly unpredictable,” said Monique Morrissey, senior economist at the left-leaning Economic Policy Institute.
An impending crisis for retirement savings
Many researchers believe America is facing a retirement savings crisis. According to Census data, less than half of people have a retirement account. Even among people between the ages of 56 and 64, who are nearing retirement, fewer than 60% had a retirement account in 2020.
Without retirement accounts, most retirees rely on Social Security. But the average monthly Social Security check in 2023 was about $1,800. The typical household run by someone 65 and older spends $4,345 a month, according to a BlackRock analysis of federal statistics.
401(k)s and IRAs emerged in the 1970s and became popular tools for Americans to build retirement savings. Over the years, this system has gradually replaced traditional pensions, which provide monthly benefits to retired workers. From 1975 to 2019, active pension participants in the private sector fell from 27 million to fewer than 13 million, according to a Congressional report.
Damon Jones, an economist at the University of Chicago, said tax-advantaged retirement plans are “a very good deal” as an investment. The government does not tax income contributed to a traditional 401(k) or IRA. You pay taxes when you withdraw your retirement funds.
According to Treasury Department estimates in 2020, the tax cuts cost the federal government about $185 billion in annual revenue losses.
But millions of Americans don’t have or can’t access tax-advantaged retirement savings. According to an AARP analysis, nearly half of workers don’t have access to a retirement plan at work.
Low-income Americans don’t get retirement tax benefits
And many low-income Americans have more pressing priorities.
“Most people in the middle class and below struggle to put food on the table and keep a roof over their head, so they have a hard time saving money,” said Steve Rosenthal, a senior research fellow at Urban Brookings University. I don’t have any money left,” he said. Tax Policy Center.
Wealthy Americans, on the other hand, tend to take full advantage of tax breaks. According to research from the Urban-Brookings Tax Policy Center, three-fifths of the tax benefits for retirement savings go to people in the top 20% of Americans’ incomes. More than four-fifths go to the top 40% of people.
“The fundamental problem with our retirement system is that it rewards people who don’t need help,” Rosenthal said. “All schemes are focused on rewarding those who have the savings and income to benefit.”
The purpose of the tax subsidy was to encourage more Americans to save for retirement, say the authors of a research brief published by the Boston University Center for Retirement Research.
But that didn’t happen. Researchers found that from 1989 to 2022, the share of workers ages 25 to 64 who participate in employer-sponsored retirement plans will increase by 2 percent, from 51% to 53%. Points increased.
“In short, they are saying that the retirement tax system is broken and should be abolished. And it’s broken,” Rosenthal said.
Many in the financial industry praise tax-advantaged retirement plans.
Agreement on this point is far from unanimous, with some in the retirement industry giving the new study a harsh reception.
Brian Graff, chief executive of the American Association of Retired Persons, commented on the paper on LinkedIn: “No, it’s not April 1st. …Personally, I can’t think of a more ridiculous idea.” This article was flagged with a warning.
Many in the financial services industry praise tax-advantaged retirement plans, saying they provide a dignified retirement for millions of low- and moderate-income Americans.
“It’s not just the wealthy,” said Craig Copeland, director of benefits research at the Employee Benefits Research Institute, a nonprofit that works with benefit agencies. “Many middle-class people have their 401(k), and that typically accounts for the bulk of their savings outside of the home.”
Copeland says that if tax benefits are taken away, employers will have no incentive to provide retirement savings in the first place. Companies use their 401(k) plans to attract workers, and employers enjoy their own tax savings by managing the plans.
“Most of these plans wouldn’t exist without the tax incentives,” he said.
Copeland said the removal of tax subsidies “will not hurt the wealthy because they are going to save.” It will hit people in the middle quartile, the middle class.
The economists who wrote the brief agree that Congress is unlikely to eliminate tax-advantaged retirement savings anytime soon.
“We know they’re not going to repeal this bill tomorrow,” Munnell said. “But that should be part of the discussion.”
Economists say that instead of eliminating the tax breaks, Congress could modify the subsidies to be a program that rewards responsible savings without lavish tax cuts for the wealthy. ing.
For example, tax subsidies could be capped for savers who have saved $500,000 or $1 million for retirement. Alternatively, the tax benefit may be limited to her first $10,000 or his $20,000 of annual contributions.
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Alternatively, Congress could lower the age at which savers must begin making withdrawals from their retirement accounts. Instead of lowering that age, Congress has raised it from 70 and a half in 2019 to 75 in 2033.
“If you’re worried about the size of your retirement plan, you can limit what goes in and you can limit what comes out,” Rosenthal said.
Daniel de Visse covers personal finance for USA Today.
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