(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Mark Miller
CHICAGO, March 30 Tax reform is up next for our
Attention Deficit Disorder Republican government, which just
rushed through a chaotic, ugly battle to reform our complex
healthcare system. The fight over tax reform promises to be just
as chaotic and ugly - and it could mean big changes for
Americans saving for retirement.
The Republican tax plan will include huge tax cuts for the
wealthy and corporations, reducing top income tax rates, rates
on investment income and corporate tax rates. Our lawmakers will
need to find new revenue somewhere to offset the cuts. That is
where retirement saving could come into play.
To understand why, it is important first to understand this
term: “Tax expenditure.”
This is Washington budget-speak for tax revenue foregone due
to special tax treatment. The phrase refers to billions of
dollars in tax code exemptions, deductions or credits. Tax
expenditures are designed to benefit specific activities or
groups of taxpayers; the most important include deductions taken
by employers for employee health insurance costs, capital gains
and mortgage debt interest.
The spectacular collapse of the U.S. House healthcare bill
last week will ratchet up pressure to find revenue
as part of any tax reform bill, since the proposed healthcare
reforms were expected to cut federal deficits by $337 billion
over the next decade. By some estimates, the tax reformers will
need to find $1 trillion or more in new revenue.
Retirement saving is an attractive target - and one that has
been in Republicans' crosshairs before. Tax expenditures for
retirement saving exceeded $158 billion in 2015, and will be
more than $1 trillion from 2015 to 2019, according to the
nonpartisan Tax Policy Center. That includes tax breaks on
traditional pensions, 401(k)s and traditional and Roth IRAs.
“Going to the retirement trough certainly is one
possibility,” said Shai Akabas, director of fiscal policy at the
Bipartisan Policy Center.
ROTATING TO ROTHS
The most ambitious retirement reform would place limits on
the current system of tax-deferred saving in 401(k) and
traditional IRA accounts, shifting the emphasis to Roth
accounts. In a 401(k) or traditional IRA, income taxes are
deferred until funds are withdrawn; Roth contributions are made
with post-tax dollars, which keeps tax revenue in the current
The blueprint for this approach can be found in the 2014 tax
reform plan crafted by former U.S. Representative Dave Camp, the
Michigan Republican who chaired the House Ways and Means
Committee at the time. Camp proposed capping employee deferrals
into 401(k)-type plans at $8,750; any contributions over that
amount would be taxed upfront (this year, the employee
contribution limit is $18,000).
Camp also proposed requiring all employers with more than
100 workers to allow Roth contributions in their workplace
plans. The income limits on Roth IRA contributions would have
been removed, and contributions to traditional IRAs would have
Moves like this appear to generate new revenue by closing
down expenditures, but that is partly because the government
estimates tax revenue only for the coming 10 years - it does not
account for income taxes collected on IRAs far into the future.
"It looks like you’re raising a lot of new money now, but
from an actual macro budgeting standpoint, it doesn’t do that,"
Shrinking upfront tax preferences could dampen saving rates,
he thinks. It also would encourage account “leakage” - the
phenomenon of drawing down retirement savings for nonretirement
purposes. Roth accounts permit withdrawal of principal at any
time without penalty (taxes and penalties are levied on
withdrawn investment returns until age 59-1/2; at that point,
all funds can be withdrawn penalty-free on accounts held for at
least five years).
More recently, House Republican leadership has signaled
interest in creating a new Universal Saving Account (USA) that
would permit contributions up to $5,500 per year of post-tax
income, and that would be free of additional taxes going
forward. It is somewhat like a Roth, with a big difference:
funds could be withdrawn for any purpose at any time.
USA accounts could help address the lack of emergency
savings in many households. But they also might discourage small
businesses from offering retirement plans, according to Brian
Graff, chief executive officer of the American Retirement
Association, an umbrella organization for several pension and
retirement plan professional associations.
"If you now have a tax-free saving account available, I’m
not sure I need to have a retirement plan if I’m a small
business,” he said. “That means employees are going to be less
likely to save for retirement.”
Graff is pointing to the biggest problem here: making big
decisions about retirement policy in the context of broader tax
reform is the wrong way to go. Considering the huge retirement
security challenges facing average American households, we
should be considering policies aimed at encouraging people to
Cracking open the retirement piggy bank to offset tax cuts
for corporations and the wealthy? That is an idea that should be
(Editing by Matthew Lewis)