In hunt for cash, law­mak­ers look to your 401(k)

45 per­cent of U.S. saves noth­ing for re­tire­ment

Houston Chronicle Sunday - - SUNDAY MORNING - By Pa­tri­cia Co­hen

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.

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