Limits on retirement plans and other tax issues won’t be on the table in the package of budget cuts and tax hikes that must be negotiated by Aug. 2 as part of a deficit reduction plan aimed at justifying a hike in the current federal debt limit.
But that is where the good news ends. In public comments and congressional testimony, the current deficit concerns lead industry officials to predict that all current tax-advantaged products will be forced to justify their continued existence, most likely in 2013.
For example, in testimony before a House subcommittee on the issue June 14, James Klein, president of the American Benefits Council, warned members of Congress that a move to a capped tax credit that provides a reduced tax benefit could discourage plan sponsorship.
He added that if sponsorship declines and more employees are forced to save on their own, they would not receive the many protections and benefits associated with employer-sponsored plans (from ERISA protection to fiduciary oversight –especially of investments and fees–to employer contributions).
Klein also said in testimony before the Subcommittee on Health, Employment, Labor and Pensions of the House Education and the Workforce Committee that the current pre-tax treatment of retirement savings is a powerful incentive for individuals.
He said that it is viewed by taxpayers “as the core of our retirement savings regime and allows them to save more on a paycheck-by-paycheck basis than would be the case with after-tax contributions.”
This financially efficient approach is particularly important for low- and middle-income families trying to make the most of scarce dollars.
“The payroll tax savings on employer contributions provides another significant advantage for modest-income households, as does the deferral on gains that spares families from annual tax bills on their accumulating savings,” Klein said.
And current incentives efficiently produce retirement benefits, Klein said.
“Repeated analyses have shown that for every dollar of federal tax expenditure devoted to tax-preferred workplace retirement plans, four to five dollars in ultimate retirement benefits result,” he said.
William Sweetnam, co-chair of the policy and legislation group of the Groom law firm, agreed that changes are coming–and that limits on retirement plan benefits for executives will be discussed.
“I would anticipate seeing proposals to further cut the tax benefits of insurance products,” Sweenam said.
However, he said, the insurance industry has an effective advocacy system in place. “I’m sure that every Congressman or woman knows at least one or two insurance brokers who will be telling the congressman or woman about the value of maintaining the current tax provisions regarding insurance,” Sweetnam said.
At the same time, he said that if there are cutbacks in Social Security, like pushing back the retirement age or means testing with regard to Medicare, higher income people will need to save more for retirement and cutting the opportunities for high-income people to save for retirement would be a “double-whammy” on the upper middle class.
“The retirement plan industry will need to point out this mixed message in terms of tax and retirement policy,” Sweetnam said.
He noted that the National Commission on Fiscal Responsibility and Reform, headed by Erskine Bowles and Alan Simpson, have suggested a limit on all contributions to retirement accounts equal to the lesser of $20,000 or 20% of income and that limit will effectively only apply limit executives’ retirement accounts.
“You may see efforts to trim the expanded benefit limits that were enacted in 2001 under the theory that only top executives and business owners benefit from those increased limits,” he said.
However, “if retirement benefit limits are decreased, there is the increased likelihood that small businesses may not sponsor retirement plans since the small business owners do not receive enough benefits to make the costs of setting up these plans worthwhile,” Sweetnam cautioned.
He said that small business groups and those that provide small business retirement plans “are trying to get Congress to understand the interrelationship between limits for high-income individuals and access to plans for low-income employees.”