Advocates defend tax initiatives for retirement savings

As federal policymakers search for ways to trim the nation’s long-term deficit, they are increasingly eyeing a piece of the estimated $136 billion in tax incentives for retirement savings.

The vast majority of this sum goes toward employer-sponsored defined-benefit plans such as pensions and defined-contribution plans such as 401(k)s. But with many analysts warning that a large and growing share of Americans are financially unprepared for retirement, the lucrative tax incentives have come under attack as being unfairly tilted toward the affluent.

Responding to that perception, some elected officials and researchers have proposed limiting or otherwise reconfiguring those incentives. But groups that advocate on behalf of the current system of retirement savings are eager to paint what they say is a fuller picture of exactly who benefits from it.

In a report released Friday, the American Society of Pension Professionals and Actuaries says that despite views to the contrary, a large majority of benefits from retirement tax incentives — 71 percent — flows to working families earning less than $150,000 a year. By contrast, the organization notes, just 8 percent of the tax benefit for the capital gains tax break goes to families making less than $150,000 a year.

“If they want to go after the Mitt Romneys of the world to raise revenue, they should go after the capital gains tax break,” said Brian H. Graff, ASPPA’s executive director and chief executive officer.

ASPPA argues that when calculating who benefits from retirement tax incentives, many analysts fail to take into account that the incentives are deferrals, not lifetime exemptions. For example, someone in the 35 percent tax bracket is able to save for retirement with pretax dollars up to the annual limit. That shields that amount of money from the 35 percent income-tax rate. But those taxes are paid — sometimes at a lower rate, depending on one’s total retirement income — once the money is withdrawn.

The group also argues in its report that because of federal nondiscrimination rules — which essentially ban highly paid employees of a company from receiving tax-preferred retirement benefits that are not proportionately available to other employees — tax incentives create a powerful incentive for business owners to provide retirement benefits for their workers. Any reduction in those incentives, ASPPA argues, would lower benefits for rank-and-file workers.

As it stands, just over two-thirds of workers are in jobs that offer retirement plans — a proportion that officials say must improve if the nation is to do a better job of saving for old age. ASPPA notes that workers are 14 times more likely to save through a workplace plan than through their own IRAs.

“The employer-based retirement savings tax incentive is the efficient and effective way to help Main Street save for retirement,” the report concludes.

Others say proposals to limit retirement incentives don’t go far enough. In a paper released this year by the Brookings Institution, vice president Karen Dynan argued for a 28 percent cap on deductions and exclusions for retirement savings, which would reduce tax benefits for the nation’s highest earners.

She also said that the Saver’s Tax Credit, aimed at boosting the incentive for low-income people to put aside money for retirement, should be simplified and made refundable, meaning taxpayers would receive the value of the credit even if it results in a net refund from the government. The credit is underused now, not only because low-income people have little money to save but also because it provides little incentive to low-income people who already pay little in taxes.

In his recently released budget, President Obama proposed putting the 28 percent cap in place, as well as a proposal to cap tax-advantaged retirement savings accounts at $3 million. ASPPA opposes both measures.

At a recent hearing, Sen. Benjamin L. Cardin (D-Md.) also criticized the president’s plan, even as Treasury Secretary Jack Lew explained that the administration’s goal is to both free up revenue and encourage lower-income people to save more.

“It seems to me you are going to make it more difficult for people to put money away for retirement,” Cardin said.

Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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