Just a few hours ago, President Trump told reporters at the White House that the popular 401(k) tax break just might be up for negotiation as part of tax reform, after all.
What a difference 48 hours makes.
On Monday, Trump tweeted that there would be “NO change to your 401(k),” as a result of the tax reform proposals now working their way through Congress. How seriously did congressional Republican leaders take this? Not too seriously! On Wednesday morning, House Ways and Committee Chair Kevin Brady (R-Texas) told a Christian Science Monitor breakfast this might not be so. “We are continuing discussions with the president, all focused on saving more and saving sooner,” he said.
Now Trump has agreed. When asked Wednesday afternoon if the the 401(k) was up for grabs, he responded, “Maybe it is and maybe we’ll use it as negotiating.”
Is your head spinning? It should be. The problem isn’t just that Trump’s position on this one issue is shifting along with his whims. It’s also what this tells us about how Republicans are generally handling this whole process, and what it means for the likely outcome. It’s already hard enough to make the American system of saving for retirement more difficult, confusing or disadvantageous for lower- and middle-income savers. But Republicans just might be on the verge of accomplishing this — all in an effort to game the budget process.
Here’s the background.
Late last week, word went out that the Republicans, seeking a way to pay for tax cuts, were casting a covetous eye on the money Americans are able to save in their 401(k) workplace retirement accounts. As of now, Americans under the age of 50 can put $18,000 of their earnings annually on a tax-deferred basis into their workplace 401(k), while those older get to put in an additional $6,000. The money goes in on a tax-deferred basis, and you pay taxes on it when it is withdrawn in retirement.
But if you put the money in something called a Roth Individual Retirement Account or Roth 401(k), the rules change. The process works in reverse. You put the money in on an after-tax basis. If you take the sums out in retirement, you can withdraw it tax-free.
According to figures provided by the Congressional Joint Committee on Taxation to the New York Times, the regular 401(k) break when combined with other individual retirement set-asides results in a $115 billion in lost revenue for fiscal year 2018. In other words, the proposed change will bring in some tax revenue now, while costing the government money more than a decade off in the future.
As it is, many Americans are on the verge of living through a retirement crisis. According to Fidelity, Americans, on average, put $5,850 into their 401ks on an annual basis. The average account holds less than $100,000. No one thinks this is adequate in terms of saving for retirement.
No surprise, Democrats are pouncing on the Republican retirement moves. “Families today are already not saving enough for retirement, and we are concerned that mandating Roth savings will diminish their ability to save even further,” read a letter sent last month from five Democratic senators to congressional leaders.
Now, to be fair, there is debate over this. At least one paper has found people don’t really change how much they save for retirement based on how money is taxed. As Teresa Ghilarducci, an economics professor at New York’s New School and a long-time critic of the 401(k) put in an email to me this afternoon, “The Republicans are right about one thing — 401k and IRA — tax incentives probably don’t do much to encourage savings overall.”
But that’s not to say Ghilarducci thinks the Republican 401(k) grab is a good idea. She doesn’t. “The Republican Plan takes retirement tax breaks from middle-class workers to pay for tax cuts for billionaires,” she continued. “It makes how half of the middle class saves for retirement more expensive while lowering taxes on the rich and not materially changing tax benefits rich people get for saving for retirement.”
The Roth, you see, favors people who can afford to pay an upfront bill so they can save more money further down the line — the wealthy, in other words. It’s more expensive initially because the saver is paying the tax in advance, reducing the amount initially going into the account.
And now Donald Trump wants to make a deal over it. That’s bad. Even worse: the tax plan is supposed to debut shortly, and it still isn’t clear if the Republicans in Congress or the White House even know what’s going to be in it. This, to use a favorite Trump word, promises to be a big mess.