Deferring taxes on money saved for retirement could be a thing of the past, if Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, and Orrin Hatch, R-Utah, ranking member, have their way.
The "blank slate" approach they propose for reforming the tax code will eliminate all tax deductions, no matter how worthy, and force the defense of any measure by advocates who wish to see them retained.
The senators cited the Joint Committee on Taxation as saying that pension and retirement savings tax breaks alone, if added back into a newly reformed tax code, could amount to $2 trillion over 10 years, and "would, on average, raise each of the seven individual income tax brackets by between 1.3 and 2.2 percentage points from what they would be under the blank slate."
But according to Brian Graff, executive director and CEO of The American Society of Pension Professionals & Actuaries, some of the tax enticements to save for retirement aren't, strictly speaking, deductions.
They are instead tax deferrals, which "power (employer-based retirement plans). … Reducing the incentive would hurt these plans. Eliminating it would destroy retirement security for working Americans," Graff said.
Retirement savings incentives fall into three different categories: tax credits, tax deductions and tax deferrals.
Among these are tax credits for contributors to a 401(k) plan or IRA (the Retirement Savings Contributions Credit or Savers Credit), and tax credits for employers who provide retirement plans (and who may be able to get a credit for part of the setup costs for eligible plans); tax deductions for contributions to a traditional IRA, as well as tax deductions for employer contributions to employee retirement plans (and even trustees' fees, if employee contributions don't cover them); and deferral of tax on contributions to a 401(k) plan (contributions are not taxed until distribution).
Tax deferrals end up being collected some years down the road — albeit likely at a lower rate; at least, that's the intent.
But if the money is to be taxed now instead, lawmakers need to consider the loss of the deferred tax, according to Judy Miller, director of retirement policy at ASPPA. "I hate to see this deferral treated like they can raise revenue now without losing revenue later," she said in a recent report.
The mix of tax credits, deferrals and deductions does, in fact, amount to a hefty chunk of change for the government. According to a recent Congressional Budget Office report, this mix costs the Treasury some $137 billion in fiscal 2013. They are, said the report, the third-highest annual tax expenditure.
Rob Austin, senior consultant at Aon Hewitt, said that given the national debt, "it's not a surprise that retirement plans are being discussed on Capitol Hill" as potential targets for tax reform.
But while there's been a lot of talk about a mass movement of employers killing retirement plans if tax benefits are eliminated, Austin says that's unlikely. That's because most employers don't offer 401(k) or retirement plans for their tax benefits, he said. Instead, they offer them to help retain good employees. "If you take away taxation benefits, I don't think there will be a sizeable move of employers to (eliminate retirement plans); they need them for employee retention," he said.
Amid the outcry against eliminating tax breaks for employer retirement plans, a study released earlier this year suggests that such an action might not make much difference.
The study looked at Danish data on savings and retirement, because the Danes have much more detailed information available and also have a pension system similar to that in the U.S.
