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Retirement Planning > Saving for Retirement

Industry Officials to House Ways and Means Committee: "Do No Harm"

By Arthur D. Postal

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Industry officials cautioned members of the House Ways and Means Committee that the first step in reforming the tax code as it relates to individual retirement tax policy should be to “do no harm.”

At a hearing today on tax reform and tax-favored retirement accounts, Randolf H. Hardock, managing partner at Davis & Harman LLP, said that the “wisest course in most instances will be to ‘do no harm’ and avoid new laws or regulations that would disrupt the successes of the current system.”

The hearing was convened by the full House Ways and Means Committee, which, by law, must originate tax policy legislation.

Judy A. Miller, Chief of actuarial issues and director of retirement policy for the American Society of Pension Professionals and Actuaries, reiterated that view in her testimony.

“The primary message I want to convey today is that the current tax incentives are working very efficiently to promote retirement security for millions of working Americans,” Miller said.

She noted that the most important factor in determining whether or not taxpayers across the income spectrum save for retirement is whether or not there is a workplace retirement plan.

“If increasing retirement and financial security is the goal, increasing the availability of workplace savings is the way to get there and modifications to the current incentives should be evaluated based on whether or not the changes will encourage more businesses to sponsor retirement plans for their employees.”

Miller also said that the discussion of simplification needs to be expanded beyond consolidation or otherwise limiting employer-sponsored plan design options.

“There are legislative and regulatory changes that could smooth the way for more small employers to adopt plans and ease compliance concerns but consolidation and loss of flexibility in plan design are not on that list,” Miller said.

“Improved retirement security and meaningful simplification will be accomplished through thoughtful modifications to the existing structure without wasting resources on cosmetic overhauls that produce more change than gain,” Miller suggested.

Hardock, testifying on behalf of the American Benefits Council (ABC), put it this way: “Since the employment-based retirement system is the most effective and significant source of retirement saving, any changes in that area should be approached with extreme caution.”

Hardock cited on behalf of the ABC the many successes of the current system and the critical tax incentives that make employer-sponsored plans so effective — both as a source of personal financial security as well as a driver of economic growth.

“Individuals have heightened retirement income concerns resulting from the recent economic downturn,” Hardock said.

But he added, “those concerns only serve to reemphasize the vital role workplace-based retirement plans play in ensuring personal financial security and in generating savings to fuel the type of capital investment the economy needs to generate long-term growth.”

Hardock said that some have suggested fundamental changes to the tax treatment of 401(k)s and other defined contribution plans, but added that, “such proposals are deeply flawed and could be fraught with unintended consequences.”

“Proposals that purport to increase short-term federal tax receipts by redirecting, eliminating, or eroding the existing retirement savings incentives would realize those additional revenues largely because individuals would be saving less for retirement,” Hardock said.

“Any major restructuring of the current system that reduces or tries to reallocate existing retirement tax incentives is a gamble we cannot afford to take when dealing with the retirement security of working and retired Americans,” he added.

William Sweetnam of the Groom Law Group, Washington, D.C., who served in the Treasury Department during the Bush administration and helped draft the regulations implementing the Bush tax policies, effectively defended the system, noting that, While some critics suggest that the current system – and tax expenditures – do not result in adequate retirement replacement rates, it is important to note that other studies show that these plans can and do provide adequate retirement replacement income, particularly when taking into account the income from Social Security.”

He said that the Internal Revenue Code currently provides various savings incentives for individual retirement savings, for employer-based retirement savings and for other savings objectives, such as the payment of medical expenses or education expenses.

At the same time, he acknowledged that all these different savings vehicles have different eligibility requirements and the amount of the tax benefit could change based on the individual’s income status or his or her participation in other savings programs.

He said the effort to review and recommend comprehensive changes to the current savings system during the Bush administration, “was, I believe, worthwhile.”

He added that “Any effort to advance tax reform will likely include a review of the retirement savings incentives,” and that if one goal of tax reform is to simplify the current system, I would recommend that the committee examine the work of the Office of Tax Policy during the Bush administration.

He said the Bush Administration’s 2004 budget proposal outlined a simplified system of tax-favored savings with only three types of tax-favored savings vehicles: Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs), and Employer Retirement Savings Accounts (ERSAs).

He also said that in the following year’s budget proposal, the Bush administration proposed similar simplification measures – modified to reflect comments Treasury officials received from retirement policy experts.

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