With just over a month left in the comment period for the Department of Labor’s proposed conflict-of-interest rule, a new paper from the Brookings Institute is proposing policies that would make the potential disruptiveness of the DOL’s rule seem insignificant.
In a Hamilton Project paper, the policy group at Brookings that addresses retirement security, John Friedman, an economist at Brown University, proposes Congress scrap all existing tax-preferred retirement savings plans and replace them with a single plan—the Universal Retirement Savings Account.
The savings plan would follow workers throughout their careers, and incentivize employers with a tax credit for every worker that deferred at least 3 percent of earnings. Deferral rates would increase 1 percent annually, be capped at 8 percent, and sponsors’ tax credits would increase accordingly.
The tax credits would count against the employers’ share of payroll taxes, which of course fund Social Security.
Lost revenue from those tax credits would be offset by limiting the tax savings currently enjoyed by retirement savers, “especially higher-income taxpayers,” according to the paper.
Friedman remains “agnostic” as to the pre-tax treatment of contributions in URSAs.
If Congress were to designate URSAs as pre-tax accounts, joint annual contributions would be limited to $35,000, with all contributions deductible at a rate capped at 25 percent.
If URSAs were set up as post-tax accounts, annual contribution limits would be set at $25,000, and aggregate capital gains on assets drawn down in retirement would be taxed at half the normal capital gains rate, instead of being tax-free, as they are now in Roth IRA and Roth 401(k) savings plans.