In hunt for cash, lawmakers look to your 401(k)
45 percent of U.S. saves nothing for retirement
When benefits adviser Ted Benna first thought up a new type of employee savings plan in 1980, the client he created it for rejected the idea as too risky. After all, no one had previously used the unremarkable section of the tax code called 401(k) to defer paying taxes on money that rank-and-file workers set aside for retirement.
So Benna decided to try it out at his own workplace, Johnson Cos., a small consulting firm outside Philadelphia.
Without intending to, Benna set off a revolution. Nearly 40 years later, 401(k) accounts are the most common employersponsored retirement plans and a raft on which millions of Americans hope to float through retirement.
Suddenly, though, they also are at the center of a battle around the tax overhaul promised by President Donald Trump and Republican leaders in Congress. A proposal to slash the amount of money workers can put in tax-deferred retirement accounts set off alarms among savers and members of the financial services industry, who contend that limiting the tax break would discourage contributions to 401(k) plans. Crisis is looming
A retirement crisis already looms. Three out of four Americans worry that they will not have enough money to get through their retirements, according to the National Institute on Retirement Security. About 45 percent have not saved a cent toward it.
Trump, sensitive to the firestorm that could be provoked by limits on 401(k) contributions, tweeted that there would “be NO change” to this “great and popular middle class tax break” — before conceding it might be a part of legislative horse-trading.
Rep. Kevin Brady, R-The Woodlands, the principal Republican architect of the tax plan in the House, also scrambled to reassure critics that a rewrite would not undermine retirement savings.
“All the focus is on, ‘can we help people save more,’ ” he said.
Yet for all the alarming rhetoric about crushed nest eggs, there are a couple of things to keep in mind.
First, the debate on Capitol Hill is not really about retirement; it’s about lawmakers’ feverish hunt for revenue to finance tax cuts. Second, no matter what happens, it won’t solve the fundamental problem — that many Americans will outlive their savings.
Details of the Republican tax plan have not yet been released, but the talk has been of imposing a cap of $2,400 a year on taxdeferred contributions to 401(k) plans — a sharp reduction from the current ceiling of $18,000 a year for people younger than 50, and $24,000 for people age 50 and older.
The tax benefit would probably come when workers withdraw funds, as in a Roth account, rather than when it’s deposited, as in a 401(k). There’s a catch
To some people, enjoying the break when they withdraw money instead of when they deposit it may not make a difference. But for Republicans in Washington desperately seeking a fast boost in revenue, timing is everything.
Their tax bill includes giant reductions in business taxes. Republican lawmakers intend to push through a bill without any Democratic support — but there is a catch. The singleparty strategy in this case triggers a rule that requires the policy to have no impact on the budget at the end of 10 years. To make the math work, lawmakers need to come up with the revenue to pay for the cuts sooner rather than later.
That’s where 401(k)s come in. Rather than allow workers to continue delaying their tax payments, the Republican leadership wants to collect tax revenue on most new contributions upfront so they can use it to pay for those expensive corporate tax cuts. That’s the equivalent of a middle-class tax increase.
“It’s just an enormous budget gimmick,” said William Gale of the nonpartisan Tax Policy Center. “It’s raiding future revenues to pay for current tax cuts. This is not a retirement security story.”
The accounting sleight-of-hand irks Gale, a former economic adviser to President George H.W. Bush, because, he says, it is financially irresponsible. “It’s just government borrowing by another name,” he said. “You’re not really raising revenue,” just changing when it’s collected.