Anyone whose job requires tracking and evaluating legislation, may—sooner or later—consider the benefits of counseling, anti-depressants, or both. It can be genuinely depressing to witness the developments, or more accurately the lack thereof, on Capitol Hill. It is depressing on the one hand to witness the lack of cooperation and compromise among senators and representatives whose job it is to govern. But it is similarly troubling to repeatedly hear from certain sectors that maintaining important Tax Code benefits—like retirement saving incentives—is incompatible with solving our nation’s budget problems, and putting our nation’s fiscal ship on a safe and sustainable course.
We believe firmly that using tax benefits to encourage people to save for retirement and addressing the federal budget issues are not incompatible goals. A closer look at the real nature of retirement saving incentives will show how much they differ from some of the other popular “perks” and “tax costs” contained in the Tax Code. If lawmakers consider just ONE very singular difference, it should be a slam-dunk to maintain retirement saving incentives. The question is whether lawmakers will take the time to really understand how they differ from other Tax Code incentives, some of which actually do result in lost federal tax revenues.
A close look at this issue is important because the nation seems headed in the direction of tax reform, later if not sooner. There are multiple tax reform options that have been proposed, most of which—to varying degrees—could significantly restrict or revamp current retirement saving options. One proposal is to sweep away all tax deductions and exclusions in favor of reduced tax rates, perhaps adding back the most critically important tax incentives. Another would limit the maximum retirement saving accumulations in combined IRAs and employer plans, while yet another would reduce and cap annual tax deferrals and exclusions. And there are more, all having the effect of limiting retirement saving tax benefits.
Most of these reform strategies are being proposed under the assumption that workers’ earnings that are deferred or excluded from income each year through retirement saving are lost to the federal revenue stream, and thereby are a “cost” in the grand federal budget-balancing equation.
This is simply untrue, and a comparison with several other popular—and worthy—Tax Code incentives will demonstrate why. Consider the universally popular home mortgage interest deduction, which all of us who have purchased a home have benefited from. By deducting from our taxable income the interest portion of our home mortgage payments, we reduce our tax obligation. But, in the bargain, the collection of federal tax revenues is reduced, permanently. Is it a benefit to society to promote home ownership? Certainly, both for tangible reasons of stimulating the economy, and the intangibles of neighborhood and broader social stability. But make no mistake, the nation as a whole “pays” for this tax perk.
The same is true of charitable giving, as noble and as beneficial to society as sharing our resources with others may be. Charitable giving deductions, like the home mortgage interest deduction, reduce taxable income, and thereby permanently reduce the federal tax revenues that such generous taxpayers would otherwise have contributed to the federal tax coffers. I am not advocating taking away these very beneficial tax incentives that most would say provide a very useful and valuable social benefit but rather using them by way of comparison to the incentives provided for retirement savings.
Consider, now, the deductions and exclusions for IRA or employer plan saving. With the exception of Roth-type accounts, every dollar that is given a tax benefit in the year it is contributed to such a plan or account is taxed when it is withdrawn, either during the saver’s retirement years, or by a beneficiary. Not only are such dollars taxed, but—in being spent by retirees or beneficiaries—they provide dollar-for-dollar stimulus to the economy.
Furthermore, the assumption of some policy makers that such dollars will be taxed at a lower rate in the withdrawal years is not necessarily sound. Many taxpayers with substantial retirement savings are NOT in lower taxing brackets after retirement, and beneficiaries—often younger and in their peak earning years—are unlikely to be in the lowest taxing brackets.
So, it cannot logically be argued that retirement saving represents a permanent loss to the nation’s budgetary process. Therefore, it cannot logically and honestly be argued that tax reform and retirement saving are incompatible. It is my fervent hope that Congress recognizes this before it throws the retirement saving “baby” out with the tax reform “bath water!”
