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Tax Reform Initiatives Fail to Protect Retirement Savings

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Tax reform initiatives put forth by both the Republicans and Democrats fail to protect retirement savings, according to Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries.

Graff said he is most concerned about Rep. Paul Ryan’s interview this past week on Fox News in which he said he would like to eliminate or drastically reduce incentives for 401(k) plans. “This could be a disaster for small business retirement plan coverage,” Graff said.

Ryan’s comments were part of an overall discussion about the plan’s elimination of tax incentives for higher income folks as a way to pay for lower tax rates overall.

“Taking away incentives for small business owners and decision-makers is really, essentially an attack on 401(k) plans. The guys who get hurt are the workers who might get left without a plan at all,” Graff said.

Ryan, R-Wis., is chairman of the House Budget Committee and author of the GOP’s budget plan that was introduced last week. As part of the plan, Ryan said he would like to eliminate all exceptions, loopholes and deductions from the tax code.  

“The tax code is patently unfair: Many of the deductions and preferences in the system—which serve to narrow the tax base—were lobbied for and are mainly used by a relatively small group of mostly higher-income individuals,” Ryan said.  He also proposed restructuring federal retirement benefits so that federal employees would have to “make a more equitable contribution to their retirement plans.”

“I don’t think he fully appreciates the dynamics that if you don’t incentivize small business owners they are not going to bother with a plan in the first place. Taking away incentives would dramatically impact retirement security for workers in a negative way,” Graff added.

Graff said that the ASPPA also is not thrilled with President Barack Obama’s deficit-reduction plan, which was proposed at the end of 2010.  He said that Obama’s budget amounted to a “double tax” on those who would offer retirement plans, reducing incentives for higher income people who won’t get as big of a tax break and capping any tax breaks at a lower percentage.

Obviously, any talk about tax reform is just talk right now. Nothing is going to move ahead until after the November election, he said.  “This is just prep talk. Obviously we have great concern when people talk about eliminating incentives that are so critical for the future of American workers. They shouldn’t be talking so casually about something that could have such a dramatic impact.”

recent report by the Employee Benefit Research Institute explored the possible consequences of modifying the federal tax treatment of 401(k) plan contributions. 

The EBRI report, written by Jack VanDerhei, looked at Obama’s proposal on federal debt reduction, “The Moment of Truth,” which was issued in December 2010. The document proposed modifying private-sector retirement plans by capping annual “tax-preferred contributions to the lower of $20,000 or 20 percent of income,” sometimes called the 20/20 cap.

He also looked at a plan proposed by William Gale, co-director of the Urban-Brookings Tax Policy Center and director of the Retirement Security Project at The Brookings Institution, that would modify the existing tax treatment of both worker and employer 401(k) contributions and introduce a flat-rate refundable credit that would serve as a federal matching contribution into a retirement savings account.

Previous reports on the subject talked about the negative effect these proposals would have on individual retirement savings, but did not look at how the changes would affect plan sponsors or plan participants’ ability to accumulate retirement savings, VanDerhei said in the report.

Surveys of plan participants and plan sponsors have shown that some would change or reduce their contributions if tax incentives for 401(k) plans were changed.

“Recent surveys of plan sponsors also suggest that not only would some matching contributions be changed in response, but that some employers would cease offering these retirement plans altogether,” the report stated. “Smaller employers were more likely to respond negatively to the proposed changes than larger employers.”

EBRI baseline analysis indicated that plan-sponsor modifications, combined with individual participant reactions, would result in an average percentage reduction in 401(k) balances of between 6 percent and 22 percent at Social Security normal retirement age for workers currently ages 26 to 35.

Plan size had a lot to do with the severity of the response.  401(k) plans with less than $10 million in assets would experience average reductions in participant balances at retirement age of between 23 and 40 percent for workers currently ages 26 to 35, the report found.

EBRI’s report took into account findings from a 2011 report by The Principal Financial Group that determined that if workers’ ability to deduct any amount of the 401(k) contribution from taxable income was eliminated, 65 percent of the plan sponsors responding to the survey would have less desire to continue offering their 401(k) plans. The EBRI report also used data from a 2010 AllianceBernstein report that questioned plan sponsors about how they would respond if employees could no longer deduct retirement savings plan contributions from their federal taxable income and had to pay federal income tax on anything an employer contributed to their savings plans. In exchange, they would receive an 18 percent match from the U.S. government.


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