The Joint Committee on Taxation recently prepared a report analyzing federal tax expenditures through the 2028 tax year. Specifically, the report found that current tax benefits related to 401(k)s and other defined contribution plans will cost the government $1.4 trillion in revenue over a 10-year period.
In the leadup to passage of the One Big Beautiful Bill Act, many fiscal conservatives within the Republican Party questioned the cost of those tax breaks and whether some of the existing breaks associated with defined benefit plan contributions should be eliminated or scaled back to offset the cost of extending the 2017 tax cuts.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the effects of retirement tax benefits on federal revenue streams and the potential effects of reducing or eliminating some of those tax breaks.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: Allowing our current level of retirement tax breaks costs the federal government trillions of dollars in revenue over the years. Yet it still doesn't seem to have a significant impact on individuals' desire to save for retirement — as we can see based on the number of taxpayers who don’t bother to save for retirement in a meaningful way. Reducing some of these tax breaks would offset some of the cost of extending the 2017 tax breaks under the OBBBA — which has absolutely been our top priority and will continue to be our priority under the new Trump administration.
Bloink: Retirement tax savings benefits don't have the negative effect on the federal government revenue stream that critical claim — and we have to consider the benefits to the economy as a whole when we encourage taxpayers to save for their own retirement, rather than relying on government Social Security alone. Keeping — or even enhancing — the current tax breaks associated with defined contribution plans has a significant long-term benefit that we cannot overlook.
Byrnes: I'm all for reducing the national debt and offsetting the cost of the OBBBA. Scaling back the currently broad scope of the immediate tax breaks for retirement contributions would offset the tax cuts that have to be more important at this point in time. We need to continue to search for ways to dig this country out of our current economic hole and continue to offset the extreme impact of inflation while also considering the national debt.
Bloink: In this debate, we should remember that we're talking about a tax deferral, not a tax exemption. Yes, allowing pre-tax retirement contributions provides an immediate tax benefit to the individual retirement saver. Still, the government recoups those benefits down the road, when the retirement saver eventually withdraws the funds and pays taxes on the amounts withdrawn — which is why we have the required minimum distribution rules in the first place.
Byrnes: Yes, retirement account contributions are eventually subject to tax when withdrawn — often at a much lower tax rate than would be applicable had the earnings been immediately subject to tax. While we of course want to encourage Americans to save for retirement, we also have to find a middle ground when it comes to government spending and the national debt. Scaling back some pre-existing benefits can go a long way toward offsetting the cost of tax benefits that are currently more essential to the functioning of this economy.
Bloink: Many critics of retirement-related tax breaks are citing the recent JCT report on the issue. The JCT's report is an apples-to-oranges comparison that only uses a 10-year period to analyze the impact of retirement-related tax benefits on the federal government's revenue stream. A more comprehensive view would be necessary to get a true sense of the impact of retirement-related tax breaks on government revenue streams, which would almost certainly be much less significant given the number of taxpayers who are currently taking retirement distributions and paying taxes on those amounts.
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