With the election behind us, Congress and the president will soon have to face some daunting issues, starting with the budget deficit. With significant revenue increases unlikely, cost reductions will be the focus, and the tax incentive for retirement savings accounts is one item under attack. The federal government uses a 5- to 10- year budget outlook which overlooks the fact that this incentive is a tax deferral, not a tax deduction.
The American Benefits Council lays out a compelling case why reducing employee contributions — the so-called “20/20” proposal — would be a big mistake. Research shows that only about 5% of people set up a retirement plan on their own, compared with 71% who participate in employer sponsored plans. The result: Retirement savings would be depressed at all income levels, with the second highest drop-off in the lowest income bracket, and serious erosion for younger workers.
Most people are not financially prepared for retirement now. Reducing their contributions would only exacerbate that problem — and put a burden on the government down the road when it will have to provide assistance.
Moreover, because of the nondiscrimination testing dynamic, lower contributions by highly compensated employees would cause some employers already concerned about the costs, liability and staff time related to their retirement plans to lower their matching contributions or even consider terminating their plans altogether.
Left unsaid is the fact that participants with larger account balances pay a greater percentage of the costs of providing a retirement plan. With fees falling overall for record keepers and advisors, the last thing we need is less revenue at a time when we need to provide greater support to help people retire comfortably.
