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Savings Tax Break Costs Exceed Actual Savings

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A tax system researcher is calling on lawmakers to revamp the U.S. retirement savings incentive system.[@@]

Today, the system is working so poorly that “total personal saving by households is now below the annual revenue cost of subsidizing retirement and pension plans,” C. Eugene Steuerle, a senior fellow at the Urban Institute, Washington, a think tank, said Tuesday at a retirement savings hearing organized by the U.S. Senate Special Committee on Aging.

Even though the amount of tax revenue that the federal government loses as a result of efforts to spur private saving is now greater than the amount private individuals and companies actually save, the incentives have been even more of a failure at raising national saving, which includes government saving as well as private saving, Steuerle said.

Tax breaks are encouraging workers and employers to deposit cash into various types of retirement and pension plans, but individuals are not actually increasing true, economic savings by cutting spending on current consumption, Steuerle said.

Instead, Steuerle said, individuals are watching retirement plan balances grow, then using home equity loans, credit cards and other mechanisms to borrow money. As a result, the mountain of private debt is about as high as the pile of private savings.

Steuerle, who represents a think tank often identified as a moderately liberal organization, also emphasized that the current U.S. system probably is encouraging workers to retire too soon.

If today’s workers worked until they had only 11 years of life expectancy remaining, as they did in 1940, they would retire at an average of about 74, not 65, Steuerle said.

“People are retiring at years when traditionally they were very likely to be significant savers,” Steuerle said. “Instead of being net savers, they turn into dis-savers, drawing down instead of building up assets.”

Steuerle offered a long list of suggestions for reforming current retirement savings incentives, including tougher restrictions on moves to withdraw assets from retirement plans and simplification of retirement plan designs.

Steuerle also recommended that the government should set up a clearinghouse that would handle tasks such as managing small accounts for departed employees, and he said mandatory retirement savings programs should be included in discussions about individual and employer-sponsored retirement arrangements as well as in discussions about the future of Social Security.

The Special Committee on Aging has posted a copy of Steuerle’s testimony and other hearing documents at


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