A ‘Cure’ Worse Than the Disease?

Last week, a trio of academics rolled out a plan to “save” Social Security—by undermining the 401(k).

Their “plan” is diabolically simple, though not unique. They’d just take away the tax preferences that support and encourage employment-based retirement plans—and “give” that money to Social Security. 

It was admittedly an odd combination—Alicia Munnell, director and founder of the Center for Retirement Research at Boston College (which often has pretty negative things to say about the private retirement system[i]), and Andrew Biggs, a senior fellow at the American Enterprise Institute, who has traditionally been a voice of reason on such matters—pointing to actual tax filing data to refute claims of a retirement crisis. Then again, Biggs, a former principal deputy commissioner of the Social Security Administration, and now a Senior Fellow at the American Enterprise Institute, has recently been nominated by President Biden to serve on the Social Security Advisory Board.       

Now there’s no question Social Security needs help if it’s to provide the benefits promised generations of American workers into the future.      

Some Assumptions

That said, their underlying premise in crafting this “solution”[ii] is that the tax incentives of the current private retirement system do little, if anything, to encourage participation. This conclusion seems to be based on “an economist’s lifestyle model”—previous reports by the CRR—and (now old) data from a study of Danish workers in a system that bears little resemblance to our own in terms of baseline assumptions and workplace demographics to conclude that savings behaviors won’t be impacted. 

They also choose to ignore the enormous opt-out rates among the state-run IRA programs that are three to four times that of those in the private system—state-run IRA programs that, it bears noting, lack the tax incentives of the 401(k). Oh, and then certain assumptions (SO many assumptions) are applied to estimate the “cost” to the government of the tax deferrals. 

That—and they completely gloss over the reality that these preferences are a DEFERRAL, not a forbearance of tax liability—unlike the tax preferences that riddle the federal income tax code at present, and which represent an actual, permanent “loss” to the federal government in terms of tax revenues.  

And Some Presumptions

But the biggest assumption they make—and it’s a BIG one—is that the lack of tax incentives will have no impact on the decision of employers to offer these programs, or to contribute to them. This happens to be a common assumption among those who reside in, or commune with the Beltway environs, most of whom it appears have never actually spoken to an actual employer.

Let’s face it, on an individual level, the incentives for higher-income workers, though real, are relatively modest. But then, and at odds with the assumptions of this paper, the true behavior subsidized by the tax preferences isn’t those individual 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. Ignored as well are the non-discrimination testing mechanisms that bound in the contributions of higher paid relative to the so-called non-highly compensated[iii]—and encourage dynamics like the employer match.

Remember as well that actual 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 almost certainly would not. 

Let’s be honest; the 401(k) is the only way we have ever gotten working Americans to save for retirement—and they, and the employers that underwrite those programs, have done so voluntarily. 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. 

Common sense dictates that you don’t fix something that’s broken by breaking something that’s working. And this “solution” would likely do just that.

- Nevin E. Adams, JD


Popular posts from this blog

4 Fiduciary Resolutions for 2024

Does Your 401(k) Need ‘Guardrails?’

Checking Your 401(k) Smoke Detectors