After Election, Tax Preferences for Retirement, Health Benefits Likely on Chopping Block

EBRI notes that assets in employment-based defined benefit (pension) and defined contribution (401(k)-type) plans account for more than a third of all retirement assets held in the United States, and a significant percentage of assets held today in individual retirement accounts (IRAs) originated as a rollover account from an employer-sponsored program. “Workers routinely rank their employment-based health coverage as the most important benefit they receive, followed by a retirement plan,” EBRI says.

But Dallas Salisbury, president and CEO of EBRI, warns that “when you look at some of the recent proposals for reform, benefit plan tax incentives are an area of total and complete volatility, and neither employers nor workers can have any certainty of what lies ahead.”

As important as retirement and health benefits are to Americans’ short- and long-term economic security, EBRI says the “sheer size of their tax preferences makes them vulnerable in the battles over deficit reduction and tax reform.”

EBRI released a list of key points that were made at the policy forum:

• Retirement benefits are a tax deferral rather than an exclusion from income—meaning the federal government will eventually recoup the forgone revenue. This distinguishes retirement plan deferrals from other tax exclusions.
• Because the tax expenditure on 401(k)-type plans is a deferral, rather than an exclusion, reducing the tax expenditure in the current period also reduces the positive stream of revenue in the future.
• The biggest difference between tax-expenditure estimates and revenue estimates for scoring tax reform is that the latter incorporates taxpayer behavior; tax expenditure estimates do not.
• Ten percent or fewer of those ages 55–60 are making withdrawals from their IRA, compared with 80% of those 71 and older.
• On a historical basis, depending on the period measured, pre-retiree balances in defined contribution retirement plans double about every eight to nine years.
• Employer match levels seemed to have a bigger impact on older workers, but automatic enrollment seems much more significant in terms of getting younger employees to participate in retirement plans.