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

Comments

Post a Comment

Popular posts from this blog

Do Roth and 401(k) Pre-Tax Holders Really Spend Differently?

Image
An interesting—and somewhat counterintuitive—report came out last week, one that cast doubt on the “common wisdom” regarding Roth versus traditional pre-tax savings. The assumption underlying the research [i] was that those who had not yet paid taxes on their savings (the traditional pre-tax savings) would be hesitant to tap into those savings and trigger taxes, certainly more so that individuals that had already paid those taxes. Instead, the research suggested that the opposite occurred; that individuals who had saved on a pre-tax basis actually withdrew more/sooner—but with a twist.  This they hailed as good news. They noted that the research suggests investing in a CT (current-taxed, or Roth) plan could help ease concerns about outliving funds—because they spend at a lower rate (though they saw this as a negative for those who saved on a deferred tax (DT) basis).  They even managed to find a silver lining in the “cloud” of faster spending by the pre-tax c...
Read more

Is the 401(k) Really a ‘Horrible’ Retirement Plan?

Image
  A recent “news” post about a blog post finds some curious “faults” with the 401(k). The news item carried the provocative title “ ‘Rich Dad’ Robert Kiyosaki Reveals Why the 401(k) Is a ‘Horrible’ Retirement Plan .” It originally ran on GoBankingRates.com, but was subsequently picked up in syndication on Yahoo Finance (at least). For the uninitiated, Robert Kiyosaki is one of those “I’ll help you get rich the way I did” types, providing that road map via books (notably “Rich Dad, Poor Dad”) and seminars. He offers comparisons to decisions made by his dad (poor dad) in contrast to those of the father of his best friend (rich dad).  Suffice it to say that his dad worked hard and saved the old-fashioned way—which is NOT his advice to you. That’s included previous pearls of wisdom like “ Why Saving Money is the Wrong Way to Prepare for Retirement .” Apparently rather than saving for retirement, we’re supposed to “look for an investment that will pay for your desired standard of l...
Read more

The Biggest 401(k) Rollover Mistake

Image
  Readers of these columns know that for years I held off rolling over my old 401(k) balances. Oh, I had rational reasons for (not) doing so; the institutional pricing of a particular fund in one, the low fees in another, the managed account option in a third—but the reality was that the process of rolling over your accumulated savings has been—and in many cases remains—painful. Rollovers are a big deal. Vanguard reports that annual contributions to IRAs ($701 billion as of 2020) far exceed all DC plan contributions, largely due to rollovers ($618 billion in 2020), while the Investment Company Institute claims that investors now hold an estimated $13.5 trillion in IRAs—“approximately $3 trillion more than in DC plans, despite the fact that 45 million fewer Americans own IRAs than participate in DC plans,” according to the report Two things, in particular, stayed my hand over the years—trying to time the liquidation of funds (I know, but I’m human), and worrying about the timing I’d...
Read more