"We do not think that this subsidy, which you can only rationalize if it increases saving ... we don't think it does increase saving very much," said Alicia Munnell , an assistant treasury secretary under President Clinton. She co-wrote the brief with Andrew Biggs , a senior fellow at the right-leaning American Enterprise Institute.
Here's why economists are coming for your 401(k) Why, then, are economists coming after your 401(k)?
That employee retirement plan and its personal savings counterpart, the Individual Retirement Account, were created to help Americans save for retirement.
But federal data suggests tax-favored retirement accounts help only some Americans, and wealthy Americans in particular.
For households in the top 10% by income, the median retirement account held $559,000 in 2022 , according to the Survey of Consumer Finances. An overwhelming 93% of those households held retirement plans.
For middle-income Americans, those in the 40th to 60th percentile by income, the median retirement plan held just $39,000, and nearly half of that group had no retirement savings.
Many smaller employers don't offer 401(k) plans. Even when they do, workers might balk at participating, because they can't spare the income or they're afraid they might need to withdraw it later on, triggering tax penalties.
"Income for a lot of workers is very unpredictable," said Monique Morrissey , senior economist at the left-leaning Economic Policy Institute.
A looming crisis in retirement savings Many researchers believe America faces a crisis in retirement savings. Fewer than half of us have retirement accounts, Census data show. Even among those nearing retirement, ages 56 to 64, the share with retirement accounts lagged below 60% in 2020.
Without a retirement account, most retirees depend on Social Security. But monthly Social Security checks averaged about $1,800 in 2023. The typical household run by someone 65 or older spends $4,345 a month , according to a BlackRock analysis of federal statistics.
The 401(k) and IRA emerged in the 1970s and gained popularity as tools for Americans to build savings for retirement. Over the years, the plans have gradually replaced traditional pensions, which deliver monthly benefits to retired workers. From 1975 to 2019, active private sector pension participants dwindled from 27 million to fewer than 13 million , according to a congressional report.
As investments, tax-advantaged retirement plans are “a really good deal,” said Damon Jones , a University of Chicago economist. The government doesn’t tax income contributed to a traditional 401(k) or IRA. You pay taxes when you withdraw the money in retirement.
The tax breaks cost the federal government about $185 billion a year in lost revenue, according to Treasury Department estimates for 2020.
Yet, millions of Americans don’t take advantage of tax-favored retirement savings − or can't. Nearly half of workers have no access to a retirement plan at work, according to one AARP analysis.
The 401(k) and IRA emerged in the 1970s and gained popularity as tools for Americans to build savings for retirement. Over the years, the plans have gradually replaced traditional pensions, which deliver monthly benefits to retired workers. From 1975 to 2019, active private sector pension participants dwindled from 27 million to fewer than 13 million , according to a congressional report.
As investments, tax-advantaged retirement plans are “a really good deal,” said Damon Jones , a University of Chicago economist. The government doesn’t tax income contributed to a traditional 401(k) or IRA. You pay taxes when you withdraw the money in retirement.
The tax breaks cost the federal government about $185 billion a year in lost revenue, according to Treasury Department estimates for 2020.
Lower-income Americans miss out on retirement tax breaks And many lower-income Americans have more pressing priorities.
“Most people, middle-class or lower, struggle to put food on the table and a roof over their head, and they don’t have the money left over to save,” said Steve Rosenthal , a senior fellow in the Urban-Brookings Tax Policy Center.
Wealthier Americans, on the other hand, tend to take full advantage of the tax perks. According to research by the Urban-Brookings Tax Policy Center , three-fifths of the retirement savings tax benefits go to people in the top 20% of Americans by income. More than four-fifths go to people in the top 40%.
“The fundamental problem with our retirement system is it rewards people who need no help,” Rosenthal said. “All the schemes are oriented toward rewarding those who have the savings or the income to reap the benefits.”
The whole point of the tax subsidies was to encourage more Americans to save for retirement, say the authors of the research brief , published by the Center for Retirement Research at Boston College.
But that hasn’t happened. From 1989 to 2022, the share of workers ages 25 to 64 who participate in employer-sponsored retirement plans has risen 2 percentage points, from 51% to 53%, the researchers found.
“ They’re basically saying we ought to call it quits on our retirement tax system because it’s broken. And it is broken,” Rosenthal said.
Many in the financial industry applaud tax-favored retirement plans Agreement on that point is far from unanimous, and some in the retirement industry greeted the new research with vitriol.
Brian Graff , chief executive of the American Retirement Association, flagged the paper on LinkedIn with the comment, "No, it's not April 1st. . . and I personally cannot think of a more preposterous idea."
Much of the financial services industry applauds tax-favored retirement plans, saying they deliver a dignified retirement to millions of lower- and middle-income Americans.
“It’s not only the rich,” said Craig Copeland , director of wealth benefits research at the Employee Benefit Research Institute, a nonprofit that works with benefit providers. “A lot of middle-class people have 401(k)s, and typically, that’s the bulk of their savings outside of their homes.”
“Most of these plans wouldn’t exist if there wasn’t a tax preference for them,” he said.
Abolishing the tax subsidies “is not going to hurt the wealthy,” Copeland said, “because the wealthy are going to save. It’s going to hit those middle-quartile people” − the middle class.
Even the economists who wrote the brief concede there’s little chance Congress will abolish tax-favored retirement savings anytime soon.
“I know they’re not going to repeal it tomorrow,” Munnell said. “But it should be part of the debate.”
Instead of eliminating the tax benefits, the economists say, Congress could modify the subsidies so the programs reward responsible saving without lavishing tax breaks on the wealthy.
For example, the tax subsidy could be capped for savers who amass $500,000 or $1,000,000 in retirement money. Or, the tax benefit could be limited to the first $10,000 or $20,000 in annual contributions.
'The economy is different now': Parents pay grown-up kids' bills with retirement savings
Alternatively, Congress could lower the age by which savers must begin drawing down their retirement accounts. Instead of lowering that age, Congress has been raising it, from 70½ in 2019 to 75 in 2033 .
“If you’re troubled by how large these retirement plans are, you can limit what goes in,” Rosenthal said, “or you can limit what comes out.”
Daniel de Visé covers personal finance for USA Today.
Strip away the tax benefits, Copeland says, and employers would lose their incentive to offer retirement savings in the first place. Companies use 401(k) plans to attract workers, and employers reap their own tax savings by administering the plans.
I saw this article on the "Bing" page when I opened my browser, and I read it and I got pissed, it reminded me of the same people that say that we regular people need to move to "Move to 15 minute cities and eat crickets to save the planet " crap that our "betters" want to foist on us, somehow we will be affected but the "cloud people" will not, they have strip us of our wealth and the 401K is a huge part of our wealth. Individually we don't have as much as the "cloud people" but together we have a lot of money, and a lot of us have clout, we vote, we are involved, and a lot of us are armed, we are the check in the overbearing ideas of the people that believe that in their schooling, family, and wealth, they should rule like the feudal lords of old and if we "dirt people" would get with the program, things would get soo much better, their college professors said so. Well I don't cotton to those beliefs, poor people are beholding to the government for survival and they will do what "the man" says to keep the government cheese coming, we in the middle class can tell "The man" to stick it.
The government leaning economist have been eyeing the 401K system for quite a few years, they don't like the idea of all that money out there that the government can't get their hand on, imagine what the government could do with all the money from the 401K system? All the social programs it could finance to "help the poor in the name of fairness" or "shore up Social Security" in the name of "fairness and equity", basically to me that is giving freeloaders my hard-earned assets that they didn't earned due to some marxist belief. People have told me that they could never do a 401K because they never had the money, and yet I saw all the poor money decisions,
The same people that say that they never have money to put away for retirement, seem to have money to get hammered every weekend, get new tattoos, the latest technology, trade in a car every year or 2 or lease one and rent an apartment or house and not buy one and so forth, am I making assumptions...you betcha but there is truth in what I say. I started my 401K back when I started at Ford Motor Company, yes they gave me a 401K option and a pension, and I started as soon as I was eligible and started maxing it out as much as I could, and when I lost my job at Ford due to "The Way Forward ", and I rolled my 401K away from Ford and I was then hired by my present employer and they also have a 401K, so I have 2 of them, one is managed by the financial company that my employer works with the other is a local wealth management firm.
The point I am trying to make is that you have to prioritize what you want to do, and do it. What I like about the 401K is that if I croak, my wife or my kid get all of it, try that crap with social security......Yeah right....your spouse gets $255 in death benefits from the SSA and that is it, any other money that you earned in your lifetime....Ha, they keep it to give to illegals and to people that never paid in the the system, and these government related economists want to make a case to take your 401K and dump it into SS? all because soo many people didn't and it ain't "fair". You know the same people that want you to Live in "15 minute cities, and eat cricket burgers....yeah them people....but the cloud people...they will be exempt from that little requirement. It is just new feudalism all over again where we can't travel far, but they can.
We are pretty good about living under our means. That is why I have a 25 year old F-150, Hey it works well and the occasional repair is much better than a note. The spousal unit drives 4 year old Edge, she does the same at her place of employment, we don't carry a balance on our credit cards..we have only 2. I do new hire tours at my place of employment and I explain the magic of compounded interest in their financial future. I use a phrase a good friend of mine used when I first met him 14 years ago.
My Friend goofing off, this was about 14 years ago
"Nobody takes better care of a old you than a young you, take advantage of the 401K match and every time you get a raise, you bump up your your percentage. so when you retire, you ain't shopping for cat food to supplement your social security" I get some strange looks but they remember that and that is the intent. If you have financial freedom, you have a lot of options."
I keep equating us to the modern day "Kulaks ", the modern statist want the government to break us like their hero Stalin did to the Kulaks of old. If they can take our money and wealth, they can control us. You notice the 68,000 IRS agents that pedo joe talked about getting all those tax cheats? you notice that all those cash transferring services have a $601 cap now before you have to declare it to the IRS? The cloud people will have tax lawyers to protect them....we won't have anybody, they will come after us instead, easier than dealing with the lawyers of the "cloud people".
I recall that NY Governor Hotchel has asked people to shelter Illegals in their homes, how much longer before it is no longer a an "ask" but a "demand", remember to a democrat, especially a big state democrat, all the assets you own belong to them, you just don't know it yet, but you will. and thanks to the crappy civics lessons we have had in the school system, they don't realize that one of the amendments kinda play into this...
the 3rd amendment, granted it was soldiers back then, but the principle was the same
No soldier shall, in time of peace, be quartered in any house without the consent of the owner, nor in time of war but in a manner to be prescribed by law.
A smart lawyer can use this to stretch this to cover "illegals" also, the principle is the same, the government is demanding that you house people in your home and you have no say in this.
I ain't bashing the rich, I just don't want to be ruled by them. We have to keep paying attention to what those clowns in D.C are up to. If the Donks get a super majority, I am afraid they will try to push through legislation and couch it in the language of "Fairness" or "equity" and tap into the "class envy" that they play on and really are successful at.
exactly. Save.
ReplyDelete"millions of Americans don’t take advantage of tax-favored retirement savings − or can't."
Bullshit. They Choose Not To.
Do you really think that the Federal government would use that money to funs Social Security? They could do that now, except that, again, they choose not to and spend the money on Social Programs.
A policy being pushed by leftists.... a corrupt incompetent group of criminals who have NEVER seen a tax they didn't like or want to impose. The only solution to problems like leftists is a good funeral.
ReplyDeleteI remember about 30 years ago Clinton planned a one time tax on all 401K holdings, in the name of reducing income inequality. I have one at my employers, and take all the match money, plus a little extra. I also am collecting a defined retirement benefit at this time, and will at the age of 60 start drawing my military pension . The 401k is nice, but it is not my retirement plan, it is going to allow me to afford to retire, by buying off all my debt. If the 401k became taxed as income it would destroy the system, and stop future investment in that rat race. The concept of taking my money, and giving it to someone who whether their fault or not, didn't participate in a retirement plan makes me responsible for people who I have no contract or contact with. How does the retirement of of stranger become my responsibility, and is t that what the ponzi scheme of Social Security is already doing?
ReplyDeleteLiving below your means is NEVER a bad idea, because you never know when it's going to 'rain on your parade'.
ReplyDelete