The Real Retirement Fraud

 A new paper rehashes (and embraces) some old beliefs, blatantly ignores the full impact of workplace savings, disregards the reality that deferrals are temporary—and kills a lot of trees in the process.  

The diatribe’s author, perhaps because he’s affiliated with a law school, perhaps because the paper (provocatively titled “The Great American Retirement Fraud”) is so long (82 pages), managed to get what amounts to a long-winded pontification published by the Social Science Research Network[i]—a network that normally publishes research. 

There’s little new here, and painfully little substance—though he does affix a label—“the Retirement Reform Project”—to the “conspiracy” he crafts between employers, investment management firms, advisors and those that support their interests. At the crux of this imagined conspiracy is none other than Rob Portman and Ben Cardin. Yes, that Portman and Cardin!
 

Reform ‘School’?

Indeed, he claims this “Retirement Reform Project” was birthed in 1996 by then-Congressmen Rob Portman and Ben Cardin as a cynical means to a political end. “By sponsoring what proved to be popular legislation, Portman and Cardin made themselves prominent and influential,” he writes. Indeed, “Retirement policy was still an uninspiring and unpromising legislative backwater when Portman and Cardin began their reform efforts, but the two men needed a policy portfolio to distinguish themselves,” he claims. 

He argues that public policy on pensions was originally designed to basically limit the set-asides for corporate execs and to protect workers—but that along the way that policy lost its way.[ii] He bemoans the tax revenues the federal government “loses” to its support of retirement plan formation and support as not needed to encourage the saving of higher-income individuals, and ill-suited to providing adequate savings for those at the lower end of the income scale (deep into the paper he grudgingly concedes that it might be serving the intended needs of those in the middle).

Incentives ‘Eyed’?

However, he—like others before him who focus  myopically on the individual tax preferences—wrongly presume that the sole motivation arising from the tax incentives is the personal individual account of the higher-income. Let’s face it, the incentives for higher-income workers, though real, are relatively modest. The true behavior subsidized by the tax preferences isn’t those contributions, but the very creation and maintenance of these plans by employers that would otherwise be disinclined to take on such burdens in the first place, much less support and incentivize participation with things like the employer match. 

Remember as well that data supports the notion that even modest income workers—those making between $30,000 and $50,000 a year—are somewhere between 12 and 15 times more likely to save for retirement if they have access to a plan at work versus doing so on their own. Sure, perhaps the wealthiest would save on their own regardless—but without the plan established by the employer, those in the lower income brackets probably would not.

He acknowledges, but quickly discounts, the potential impact of things like top-heavy testing and non-discrimination testing in limiting the gap between highly compensated worker/owners and others. However, there’s actual data from the nonpartisan Employee Benefit Research Institute (EBRI) that shows that while higher-income individuals have higher account balances, those balances are in rough proportion to their incomes (see https://www.napa-net.org/news-info/daily-news/%E2%80%98upside%E2%80%99-potential).

Deferrals Aren’t Forever

Another tired and readily disproved assertion treats the tax preference for these programs as equivalent to money the federal government expends on initiatives like “renewable energy, building low-income housing, donating to charitable organizations, pursuing research and development”—but, and unlike those initiatives, he completely ignores the reality that retirement plan preferences are a deferral, not a forbearance of tax obligations—not just of the contributions but on the accumulated income as well (which he labels the “core tax subsidy for private retirement savings”). Which, not to put too fine a point on it, will be taxed at ordinary income rates, rather than the capital gains rate that would likely apply if the wealthier individuals that he alleges would save on their own did so.

He even takes issue with the restrictions on access to retirement monies in the form of penalties and taxes—seeing those as some kind of absurd green “handcuff” to keep the assets (and fees) in the hands of the financial services industry. Catch-up contributions? “The point was never anything other than to increase the contribution limits for higher-income earners.” Ditto the extension of the required minimum distribution.  

Towards the end of the rant, data finally emerges—data from the National Institute on Retirement Security (NIRS) regarding retirement readiness, and the Federal Reserve’s Survey of Consumer Finances (SCF) regarding retirement account balances. Now, the SCF winds up being widely cited (including by the NIRS), but is not without shortcomings, as we’ve noted previously. The SCF relies upon self-reported numbers, and not by the same people over time, but by different groups of people (at different points in time). The NIRS analysis builds on that shaky foundation by incorporating some assumptions about defined benefit assets and extrapolating target retirement savings needs based on a set of age-based income multipliers—income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement—and this is the touchstone on which this author anchors his conclusion about retirement readiness? 

Having spent so much ink dissing the current system, one might think that somewhere in 82 pages of rant, he’d find room to suggest an alternative. But you’d be wrong. 

There is, however, a conclusion, and there he opines that, “Genuine reform would curtail retirement-savings subsidies for higher-income earners, who do not need those subsidies as incentives for retirement savings. Genuine reform would convert tax deductions, tax exclusions, and non-refundable tax credits for lower-income earners into direct, government-funded enhancements of retirement security—preferably through Social Security but otherwise through private retirement accounts. And genuine reform would leave the status quo in place for middle-income earners, who respond as expected to the marginal incentives of retirement-savings subsidies and who likely would not save in the absence of those subsidies.”  

Oh—and apparently he intends to show this “better path” in “future work.” I can hardly wait.

Let’s be honest; the 401(k) is the only way we have ever gotten working Americans to save for retirement. Those who have access to those programs are doing well. The only problem with the 401(k) is that not enough working Americans have access to one.  

At one point during the paper he states that, “The object of this paper is to identify this nonsense for what it is.” 

And if by “this nonsense” he means the paper itself, in this observer’s opinion, he has succeeded.

- Nevin E. Adams, JD

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[i] Which touts itself as a repository for preprints devoted to the rapid dissemination of scholarly research in the social sciences, humanities, life sciences, health sciences and more.

[ii] “I argue that the primary objective of the legislators who have promoted the retirement-reform project over the past twenty-five years has been to advance the interests of employers and the financial-services industry. Employers bear many of the costs imposed by federal regulation of retirement plans, and they have repeatedly pushed for deregulation. The financial-services industry collects investment-management, investment-advisory, and other fees from retirement-plan and IRA assets. Its interests therefore align closely with the interests of higher-income earners, and it has repeatedly pushed for increases in the contribution and benefit limits and for relaxation of the rule requiring distributions during retirement. Before the retirement-reform project, the objectives of Congress were to protect employees from abusive practices by employers and financial-services companies and to contain the cost of retirement-savings subsidies. Under the retirement-reform project, the objective of Congress has been to give employers and the financial-services industry more or less whatever they ask for.”