Not only will proposals to cut savings incentives in retirement plans jeopardize low- and moderate-income workers' chances for secure retirements, but the anticipated budget savings are between 55% and 75% lower than expected, research released Tuesday by the American Society of Pension Professionals & Actuaries found.
According to ASPPA, the current cash-flow analysis used by the congressional Joint Committee on Taxation and the Treasury Department’s Office of Tax Analysis to evaluate the costs associated with tax deferrals in defined-contribution plans don’t include taxes paid by workers because they aren't paid until after the worker retires. That tax revenue is counted as lost rather than deferred.
Research by economist Judy Xanthopoulos and tax attorney Mary Schmitt for ASPPA found that by using present-value analysis, the estimated five-year cost of retirement plan tax expenditures is 55% lower than the Joint Committee's estimate and 75% lower than the Treasury Department's.
“ASPPA’s analysis, which takes the same long-term view that economists employ in evaluating other forms of investment, shows that the short-term window used in Washington budget-scoring overstates the cost of retirement savings incentives – and therefore the savings that would result from slashing these incentives,” Brian Graff (left), executive director and CEO for ASPPA, said in a press release.
Graff added that defined-contribution plans like 401(k) s are the "best way for Americans to save for the future." Reducing the incentives for workers to save, he said, "will send millions of low- to moderate-income workers into retirement with little savings.”
Putnam Investments President and CEO Robert Reynolds agrees that 401(k)s are a valuable tool to help workers prepare for retirement.
“We absolutely need to take steps to balance the federal budget and put the nation on the path to fiscal solvency, but nothing we do to achieve national solvency should come at the expense of personal solvency, especially private retirement savings or incentives for companies to offer 401(k) plans to their workers,” Reynolds said before the Greater Boston Chamber of Commerce Executive Forum on May 24.
ASPPA found that families that make less than $100,000 receive 62% of tax benefits associated with 401(k) plans, but pay only 26% of the total income taxes received by the federal government. Graff told Washington Bureau Chief Melanie Waddell in the June issue of Investment Advisor that "for every dollar of income taxes paid by lower income workers, they get almost four dollars back in tax incentives."