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.