An economic advisor to former President George H.W. Bush unveiled a proposal on Friday to reform the current retirement savings system by replacing the current deduction for contributions to retirement savings accounts with a flat-rate refundable credit that would be deposited directly into a saver’s account.
The proposal, put forth by William Gale, who is currently a senior fellow in economic studies at the Brookings Institution in Washington, would replace the existing tax deductions with a flat-rate refundable credit that serves as a matching contribution into a retirement savings account.
In introducing the proposal at a briefing on Friday, Gale said that as the Joint Select Committee on Deficit Reduction deliberates on medium-term budget options, “consideration of reforms to strengthen the private retirement system would be appropriate and constructive, especially since any plausible long-term fiscal plan will involve some reductions in Social Security and Medicare benefits.”
The Joint Select Committee on Deficit Reduction, which was part of the debt ceiling deal reached by President Obama and Republican leaders, is charged with developing legislation that provides $1.5 trillion in deficit reduction by Thanksgiving.
Gale argued that the proposal is consistent with principles of broad-based tax reform and reducing tax expenditures, adding that the proposal could raise substantial amounts of tax revenue. For instance, an 18% matching credit is the equivalent of a 15% deduction. Such reform, the proposal states, “would raise more than $450 billion in revenues over the next decade relative to current law.”
An alternative version of the proposal would consist of a 30% credit that would be revenue-neutral for the next decade. This reform, the proposal states, would reduce taxes for 26% of the population, mainly in the bottom 90% of the income distribution, and decrease tax deductions for 6% of the population—largely for higher income workers.
William Sweetnam, co-chair of Groom Law Group’s policy and legislation group, and the former Benefits Tax Counsel in the Office of the Tax Policy at the U.S. Department of the Treasury, told AdvisorOne that he doesn’t think Gale’s proposal will get very far with lawmakers because “it fundamentally changes the way 401(k) plans” work.
The proposal would also be “difficult to consider,” Sweetnam said, because it includes many administrative issues. “It would be difficult to move a proposal like this in the context of tax reform” considering the “short-term window” that the Joint Select Committee has to work under, he said.
Brain Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries (ASPPA), said that Gale’s proposal is “wacky,” and that if it were enacted, it would put an end to all small business retirement plans.
Senate Finance Committee Chairman Max Baucus, D-Mont., plans to convene two hearings on tax reform next week. The first, “Tax Reform Options: Marginal Rates on High-Income Taxpayers, Capital Gains and Dividends,” will be held on Wednesday, Sept. 14. Baucus and the witnesses will examine the tax treatment and possible options to allow tax rates on high-income earners, capital gains and dividends to rise, including various budget and surtax proposals.
The second hearing, “Tax Reform Options: Promoting Retirement Security” will be held on Thursday, Sept. 15. Both Graff and Gale will be providing testimony at the hearing.
The hearings are the next in a set of hearings being held this fall to examine various segments of the economy and tax code, and pass on information to the Finance Committee as it considers possible recommendations to the new Joint Select Committee on Deficit Reduction.