Obama budget proposes retirement savings cap

With the release of its 2016 spending blueprint Monday, the Obama White House officially signaled its intent to use retirement policy to raise taxes on the wealthiest Americans. 

The proposed 10-year budget, which allots $4 trillion in spending for fiscal year 2016, will attempt to cap tax-deferred saving in 401(k) and Individual Retirement Accounts at about $3.4 million. 

That amount of savings generates more than $200,000 of income annually in retirement when annuitized, an income stream that should be sufficient for most, according to the Obama administration’s rationale behind the proposal.

The vast majority of Americans would never feel the cap. In 2011, only one out of every 1,000 Americans had more than $3 million in their retirement accounts, according to the Employee Benefit Research Institute. That said, many in the industry oppose it, especially in light of concerns over rising interest rates.

“Politically, it is convenient to target people who have saved $3.4 million,” Klein said. “But the devil is in the details when you look at the impact on younger workers and the inevitability that interest rates will rise over the coming decades.” 

The problem is that annuity prices vary with interest rates because insurance companies buy bonds to finance pay-outs. When bond yields are low, as they are now, annuities are more expensive. Right now a 10-year Treasury bond yield is just 2 percent. If it jumps to 5 percent (the rate in 2006), that $205,000 annual annuity would only cost $2.2 million. 

The cap is a relatively small gambit in the budget’s larger effort to raise revenues by increasing capital gains taxes, inheritance taxes, and taxes on foreign revenue streams of U.S. multinational companies.

See also: 6 top tax changes for 2015

The budget also purports to stimulate middle-class incomes with a series of spending initiatives and tax cuts. 

New retirement regulations in the budget would also make it easier for workers to save for retirement through their employers by giving 30 million more workers access to IRAs in which they are automatically enrolled, according to a fact sheet published on the White House’s Office of Management and Budget site.