Friday, February 06, 2015

A Deja View on Retirement Policy?

One of my favorite movies — and perhaps my favorite “holiday” move — is Groundhog Day, the 1993 film starring Bill Murray as an arrogant weatherman who finds himself stuck in Punxsutawney, Penn. by a blizzard, who then discovers that he is also “stuck” reliving February 2 — over and over and over. A feeling, quite literally, of “déjà vu all over again.”

Murray’s character goes through some semblance of the five stages of grief (denial, anger, bargaining, depression and acceptance) as he comes to terms with his predicament, but even as he tries to break out of this cycle, he learns from his past experience(s) and modifies his behaviors accordingly; avoiding stepping in a deep puddle of slush, ducking an insurance salesman, and even carrying his own jack to help change a tire. Eventually, of course, all that “learning” pays off, though not without a lot of pain and frustration.

There was, in fact, something of a feeling of déjà vu in President Obama’s budget proposal yesterday, certainly with regard to workplace retirement plans. In addition to some new incentives around encouraging automatic enrollment and expanding access to part-time workers, making a return appearance was giving the Pension Benefit Guaranty Corporation (PBGC) the authority to set risk-based premium rates for pension plans and the administration’s proposal to mandate employer offering of “automatic” IRAs who do not already offer a workplace retirement plan, this time channeled to the myRA structure outlined a year ago.

The 2016 budget proposal also resurrects the notion of imposing a reduction on the value of itemized deductions to 28% — including retirement contributions, and the imposition of a retirement savings cap.

Arguably, these proposals stand little chance of making their way into reality. That said, the latter two proposals in particular are blunt policy instruments, and seem likely to reduce, not enhance, the nation’s retirement security prospects.

Consider that a year ago when the savings cap was introduced in the 2015 budget, projections by the nonpartisan Employee Benefit Research Institute (EBRI) show that more than 1 in 10 current 401(k) participants are likely to hit the proposed cap sometime prior to age 65, even at the current, albeit historically low, discount rate of 4%. When you apply the higher discount rate assumptions closer to historical averages, the percentage of 401(k) participants likely to be affected by these proposed limits increases “substantially,” according to EBRI.

As for the itemized deduction cap, it would mean that those affected — likely those making the decisions on matching contributions of offering a plan in the first place — would pay taxes on contributions in the year the contributions are made, and then again at the full rate when contributions are distributed at retirement. How’s that for dis-incentivizing workplace retirement savings?

Indeed, perhaps the thing most troubling about the latter two proposals in particular is that they reveal a basic misunderstanding about the interrelationship between the incentives to employers to offer these programs, and the existence and expansion of these plans.

In sum, they don’t appear to understand that if you diminish the incentives to employers of participating in workplace retirement plans, you’ll likely see fewer retirement plans in the workplace.

So, while we’d like to think that those guiding retirement policy would learn from their mistakes, it looks like instead it’s déjà vu all over again.

- Nevin E. Adams, JD

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