Tuesday, January 29, 2013

Retirement Industry Hopes to Avoid Another “1986”

Consistent with the behavior in Washington D.C. these days, lawmakers labored into the final hours of 2012, and early hours of 2013, to complete legislation to avert the so-called “fiscal cliff.”  That legislation, the American Taxpayer Relief Act (ATRA), temporarily avoided mandatory cutbacks in federal spending, preserved lower income tax rates for most Americans, and addressed a multiplicity of other things, including provisions that have a direct impact on IRAs, Coverdell Education Savings Accounts, and designated Roth accounts in employer plans.
But ATRA did not solve the nation’s debt crisis.   Nor did it address the need to find a long-term solution to the imbalance between federal expenditures and tax revenues.  These tasks remain ahead for the 113th Congress and President Obama.  Unfortunately, there are few signs that the sometimes bitter partisanship that ruled the 2012 congressional session and general election cycle are going away anytime soon. 
Regardless of how the politics of 2013 play out, and however long it takes to resolve, there is virtually no escaping the need to restore some semblance of balance between federal revenues and expenditures.  How that will be done could affect any of a number of taxpayers, and niches in the U.S. economy. 
Among them are retirement and other tax-advantaged savings vehicles, and the American workers and taxpayers who contribute to them.  Some lawmakers and independent policy “wonks” have suggested tax reforms that eliminate or cap itemized tax deductions, including those for IRA and employer sponsored retirement plan contributions.  Others have suggested reducing annual contribution limits; for example, limiting annual retirement plan benefits to the lesser of 20 percent of income, or $20,000.  It’s not unreasonable to expect still other “creative” solutions to find their way into the budget balancing dialogue.
As worthy an ambition as balancing the federal budget is, that goal must be weighed against the long-term, big picture priority of a U.S. workforce able to retire with reasonable financial security.  This is not a selfish goal that benefits only retirees.  Their financial needs and preparedness directly impact the nation as a whole.  It is a matter of their ability to support themselves without dependence on government assistance, and to help drive the U.S. economy through their participation as consumers.  To hinder workers ability to save for their retirement now almost assures that there will be unfavorable economic and fiscal consequences for the nation in the future.
While some seem to believe that Americans will still save without the tax incentives now present in the Internal Revenue Code, those of us who were around in 1986 can point to the Tax Reform Act of 1986 (TRA-86) as an example of what occurs without tax incentives.  Following the significant reduction in IRA deductibility that was the result of TRA-86, the volume of IRA contributions fell dramatically.  From 1986, when the IRA deduction was universal and fully deductible, to 1987 and later years, when deductibility was limited by household income for those participating in an employer plan, we saw regular IRA contributions drop almost immediately by half.  This seems to be a fairly clear-cut example demonstrating that tax incentives do encourage saving, and that without them saving will not occur in many cases.
A big difference between 1986 and 2013 is that the retirement industry is mobilized to defend the presence of retirement saving incentives in the Code.  Many industry voices have already been heard, delivering what I consider to be among the most effective and accurate  arguments, this being that retirement saving results in a delay in the receipt of tax revenue until retirement, not a loss of tax revenue.  Those in Washington need to consider the long term effect savings has and not focus solely on the short term tax revenue impact. 
That said, no one in the industry should be complacent, or confident that there is no real threat to today’s retirement saving model.  Continuing to make our voices heard loud and clear by our congressmen and senators is vital to preserving all workers’ chances for a secure retirement.