Advisor One, Feb. 16, 2012
No Tax Reform Without Incentives for Retirement Savings
Argue 2 Congressmen at Washington event
Republican and Democratic congressmen push
resolution to retain current tax incentives
by Melanie Waddell
... Reps. Jim Gerlach, R-Pa., and Richard
Neal, D-Mass., both members of the House Committee on Ways and Means,
introduced a joint resolution on Thursday that would make it the "Sense of
Congress" that current tax incentives for retirement savings should be
retained in any reform of the tax code. ... Neal also introduced two other
bills—an auto IRA bill and a bill to simplify and enhance qualified
retirement plans called the “Retirement Plan Simplification and Enhancement
Act of 2012â€
...
Putnam
research has found that “workers who have access to workplace savings plans
and participate in the plan and defer 10% or more of income are on track to
replace 100% of income once you add in Social Security.â€
2-4-8 Response: Tax Free Retirement Plans May
Go too Far
Even a well intentioned “joint resolution … that would
make it the ‘Sense of Congress’ that current tax incentives for retirement
savings should be retained in any reform of the tax code†can have
unintended consequences. The projected 10-year growth of Social Security
(about 25 billion a year) and Medicare (about $20 billion a year) and the
fact that the government is running on borrowed money is a problem that
needs to be addressed.
The Social Security and retirement programs should be
viewed as part of a coherent federal package. Suggested fixes for social
security have not been found. Lowering the amount of benefits is not very
popular with those already living near the poverty line. Delaying the
retirement eligibility age on the rational that people are living longer is
not fair to those that are less likely to live as long (i.e. males,
minorities, overweight, smokers, hypertension, etc.). When seniors work into
their golden years it also has the unintended consequence of there being
fewer jobs for younger workers.
One solution that has not been fully explored is that
of cutting back a bit on tax exempt retirement programs – (those in addition
to social security). Since the 1974 Employee
Retirement Income Security Act (ERISA) employers and workers have
participated in a wide range of tax exempt retirement programs. There are 90
million people with $17.5 trillion in retirement assets (a household median
of $100,000).
A
question arises as to what public savings might be achieved by ending the
retirement tax saving holiday for those who don’t really need it. The tax
subsidy might be ended for those with private wealth that will effectively
match the maximum social security amount. It’s not that $40,000 or $50,000
would be a lavish income. Rather it is a matter of fairness to suggest that
other taxpayers should not be subsidizing more than a basic retirement life
style (I call it the Social Security times two level). By taxing surplus
accumulated retirement money that has never been taxed and by halting tax
exempt participation when that level is reached, the expanded tax base would
produce significant additional revenue. For example, it would only take an
expanded tax base of $3 trillion to produce $45 billion a year at a 15% tax
rate.
A more
stable long range solution would require a bold reform that expands the tax
base for all. I call it the 2-4-8 Tax Blend and it is described at www.TaxNetWealth.com.
Eugene
Patrick Devany, JD, MPA
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