President’s Budget Includes More Than at First Met the Eye

No matter whom the occupant of the White House happens to be, that person seems bound to please some, while displeasing others.  This is the case with just about any decision or proposal made by the Chief Executive.  It was certainly the case when President Obama’s 2014 fiscal year budget proposal was released, and it became evident that it would break some new ground with respect to retirement savings provisions.

The president’s proposal of a dollar cap on tax-advantaged retirement accumulations, and also a limit of 28 percent on any taxpayer’s benefit for income tax deductions and exemptions, were immediately criticized as hostile to the goal of saving for retirement.  Like many others, we were not especially pleased with these proposals, as they seemed to be a changing of the rules while the game is in progress.  However, the president’s 2014 budget contained a number of other provisions that could affect retirement saving, provisions that merit comment, too.  Here are our thoughts on some of them.

§  An automatic-enrollment workplace IRA program would be required of most employers that sponsor no retirement plan, that have been in business for two or more years, and have 10 or more employees.  The proposal includes a start-up credit for employers with 100 or fewer employees.   Traditional or Roth IRAs could be used, with a Roth IRA proposed as the default.  Some may see this as potentially siphoning off true “qualified plan” business, but to the extent that more workers at least begin saving in preparation for retirement, the industry and the nation as a whole benefit.  And, such a program could eventually lead an employer to establish a more traditional retirement plan.

§  Required minimum distributions would be waived for persons with aggregate IRA and employer plan balances that do not exceed $75,000.  This could be beneficial to many retirees who have other assets to help support them in retirement, and who want to preserve tax-deferred amounts until they are actually needed.  

§  Nonspouse beneficiaries would be allowed indirect rollovers between retirement plans and IRAs, and between IRAs.  “Inherited IRA” status would remain a requirement.  In the past, the inability of nonspouse beneficiaries to execute an indirect rollover has been a trap that has caught—and cost—many.  An indirect rollover option would also allow nonspouse beneficiaries to “split” pre-tax and after-tax portions of inherited employer plan accounts when rolling them to inherited IRAs, something they now cannot do because of the present nonspouse beneficiary direct rollover requirement.

§  The maximum small employer retirement plan start-up credit would double from $500 to $1000 per year, and would be available for four years instead of three.  Anything that encourages employers to establish new plans, including tax credit incentives, is worthy of consideration.

§  Electronic capture of employer plan data could be expanded.  A provision of the president’s budget proposal would authorize the IRS to require that nondiscrimination testing data be included on electronically-filed Form 5500 plan returns.  The IRS seems intent on identifying retirement plans that have potential noncompliance issues, and requiring the annual submission of testing data would seem to be a step in that direction.  It would, at minimum, seem to necessitate revising some recordkeeping procedures and Form 5500 generating systems, which would be costs that participants would ultimately bear.  “Is this really necessary?” is the question we ask. 

§  E-filing of information returns could broaden.  The IRS would be given authority to set a threshold below the current 250 for mandatory electronic filing of information returns, including the 1099 and 5498 form series.  A maximum $5,000 penalty could be assessed for failure to e-file when required.  Yes, we live in an increasingly “wired” world, and electronic submission is increasingly more the rule than the exception for trustees and custodians that submit such forms.  But for those with limited filing numbers, the option to submit in paper format rather than deal with programming and software issues may still be valuable.

§  Five-year depletion of IRA and employer plan accounts by nonspouse beneficiaries would be required under the president’s proposed budget.  There would be certain exceptions, including beneficiaries with a disability, a chronic illness, minor status (reverting to five-year payout upon reaching the age of majority), and those whose age is within 10 years of the decedent.  While we recognize that IRAs and employer retirement plans are not primarily for the purpose of inter-generational wealth transfer, it seems that this provision takes away one of the few simple means of providing financially for family members after one’s death.  The concept is intended by lawmakers to raise revenues to finance other tax provisions, and should be recognized as such, rather than as some kind of noble tax policy.

It is highly unlikely that President Obama’s proposed budget will find its way into legislation and become law in its current form.  Given the split in control of the Senate and House, and the meager evidence of across-the-aisle cooperation, expectations for meaningful legislation in the 113th Congress are low.  Nevertheless, all laws begin as proposals, and elements from different sources can become assembled into legislative packages that find their way into law.  Therefore, serious scrutiny should be given to any proposals that could have an impact on retirement saving.

DOL Takes Next Step Toward Lifetime Income Rules

If we were to identify one message that towers over all others in the retirement savings realm, it would be that the typical American is saving far too little to assure a financially comfortable retirement.   We can talk all we want to about whether retirement plans offer the most prudent investment offerings, whether fees associated with these plans and the underlying investments are appropriate, and whether workers are being adequately educated to make the right investing decisions.  But the one critical thing that improvements in these areas will not alter is the fact that the typical participant is not saving enough to start with.

This inescapable truth is certainly one of the motivators for the current focus of lawmakers and regulators on providing plan participants and beneficiaries with projections of the resources they will have during the years after their retirement.  “Lifetime income streams” is the operative term, and the latest manifestation is the advance notice of proposed rulemaking (ANPRM) issued by the Department of Labor’s Employee Benefits Security Administration (EBSA), and published on May 8^th in the Federal Register.  This proposal and request for public comment describes the lifetime income projections EBSA is considering requiring on benefit statements provided to plan participants and beneficiaries.  They include projecting future retirement accumulations if a worker continues to save, as well as estimates of monthly income for life, based both on current retirement assets, and estimated assets with continued saving. 

Fear can be a great motivator, and fear of an impoverished retirement could well be the result of these lifetime income projections.  If it is demonstrated to workers that current balances or current retirement saving patterns cannot be counted on to produce assets that will last through retirement or sustain an individual’s lifestyle, it appears that EBSA’s hope is that this will be the motivator that leads workers to change their behavior and save more. 

One of the things a bit surprising about EBSA’s recent release was that it stopped short of the status of proposed regulations.  This, after EBSA had collected over 700 public comments since 2010 on how best to present lifetime income information to participants and beneficiaries.  Some speculate that by laying out the agency’s preferred options, while at the same time asking for comment on them, EBSA is casting itself as more responsive, perhaps avoiding criticism for issuing a set of rules without adequate opportunity for interested groups to respond.  We well remember EBSA presenting fiduciary definition regulations in October of 2010, only to withdraw them in November of 2011 in the face of heavy and organized opposition.  Perhaps EBSA wants to avoid a déjà vu experience.

One of the themes we are already hearing in industry responses is that it would be much simpler to require projections only over single life expectancy.  This, it’s being said, would make it unnecessary to track marital status in order to make projections over joint life expectancy for married participants, with further complexity if a 50 percent survivor benefit is required.  A single life projection would certainly be simpler.  But, given Congress’ and the Tax Code’s history of protecting spousal retirement benefits, this is a position I believe EBSA is unlikely to adopt.  Adding to this is the consideration that a lifetime income projection based on a single life expectancy would yield a significantly higher monthly benefit than if it were calculated over joint life expectancy with a 50 percent survivor benefit.  Such a projection would be out of sync with the combined life expectancy of—and assets needed by—a typical couple. 

At least one of the elements of EBSA’s release will likely be seen differently by various groups and can be seen as a mixed blessing.  It is the proposed flexibility to use either an EBSA-provided safe harbor, or—alternatively—a reasonableness standard, both when projecting potential future retirement accumulations, and converting current and potential future balances to monthly lifetime income.  Flexibility is always appreciated in our industry.  The ability to use projections, calculators and methods that some have already developed and are using will be appreciated.   On the flip side, if one plan uses the EBSA-provided safe harbors and another plan uses “reasonable” assumptions for contributions, interest rates, mortality, etc., then similarly situated individuals could have lifetime income projections that differ, potentially greatly.  This could invite plan-to-plan comparisons that may be misleading, and leave participants or beneficiaries believing that one plan’s investment performance is superior, when in fact this may not be so.  It will be interesting to see the responses EBSA receives related to this part of their proposal.

EBSA has not indicated when it intends to act upon the responses received during the public comment period that ends July 8, 2013. The agency has suggested the possibility that it might stop short of issuing actual regulations on lifetime income streams if it can find an alternate means of achieving its objective. However, it seems highly unlikely that EBSA would willingly allow a purely voluntary delivery of lifetime income projections to plan participants and beneficiaries.  More to come on this as it will continue to be an area of focus in the coming months and years.

PBS Frontline Presents "Fuzzy" Retirement Plan Picture

In today’s world of ever-expanding communication channels, both formal and informal, the lines between journalism, opinion and entertainment are increasingly becoming blurred.   The Public Broadcasting System (PBS) television “documentary” The Retirement Gamble, aired on April 23^rd on many PBS stations, is a good example of this. 

“Documentary” is in quotes here because in my opinion this presentation did not live up to the standards of the balanced journalism one would expect of PBS.  Rather than a presentation of information and facts, which is what a documentary is generally thought to be, this was an uncharacteristically simplistic, soap opera-like, and—least pardonable—unbalanced and biased program with an apparent agenda.  Two of its primary sources of information were academics who are well-known foes of 401(k) plans, and of plan participants being responsible for directing their own investments.  While Frontline did present interviews from some highly-placed persons at several investment firms that are significant players in the retirement industry, it seems they chose very small portions of the interviews to televise that were  intentionally designed to make these individuals look unsure and ill-informed.  We also know that others in the retirement industry were interviewed at length but Frontline chose not to present those interviews and that side of the retirement story.  It appears that interviews that presented ideas, suggestions or conclusions contrary to the program’s agenda, were not included.  Definitely not an unbiased or balanced approach. 

A main take-away for the typical viewer is likely to be that American workers will have inadequate retirement assets because they are being fleeced by the mutual fund industry, through fees charged for their investments.  Another impression may be that there is no meaningful oversight by regulatory agencies charged with protecting the interests of workers who save for retirement, something that recent DOL and IRS regulatory history would tend to refute.

It would be unbalanced on my part to claim that there are never conflicts of interest in the retirement plan investment, service and administration environments.  We live in a largely for-profit, capitalistic world, where personal gain is a driving force in the economy of our country and other nations.  Human imperfection being what it is, there are occasional abuses.

Sometimes, however, what one man portrays as abuse may be another man’s reasonable reward for his efforts, time and talent.  Portraying issues in black and white terms is convenient when trying to win a debate, support a thesis, or sway audience opinions.  But such clear distinctions are not so common in the real world.  As journalist and essayist H. L. Mencken put it, “For every complex problem there is a simple solution, and it’s wrong.”

That said, there is certainly a place for seeking—for mandating—honesty and fair dealing, especially in environments where the in expertise of others—such as a retirement investor—makes them vulnerable to being misled and taken advantage of.  But, rather than the unregulated, exploitative plan administration and investment environment that Frontline presents, we and others in the industry believe we are moving steadily in a direction that protects the retirement plan participant.  This is happening through regulations addressing fee disclosure, investment performance, investment advice, automatic employee enrollment, and more importantly, a genuine desire on the part of many retirement professionals to help participants achieve a secure retirement.

Some may argue that in a perfect world a retirement plan participant would be able to invest his or her retirement plan contributions without any sales charge, advisory fee, marketing fee, surrender charge, or expense of any kind.  But that world does not and cannot ever exist.  In such a world there would be no incentive for professionals in the investment and retirement industries to provide the services and support that plans and plan participants need.

Also not stated by Frontline was the fact that there are fees associated with investments outside of retirement plans, whether they are mutual funds, annuities, or some other investment vehicle.  Charges are not unique to retirement investing.  The reality is that investing through one’s retirement plan often results in lower charges due to the types of investments, share classes, and volume of dollars being invested.   No less important, there can be equally great—or greater—undesirable long-term consequences for not investing at all, or investing too conservatively. 

Are 401(k) plans as they exist today the perfect solution to a secure retirement for all Americans?  Perhaps not perfect, but they are an extremely valuable and beneficial tool.  A secure retirement, like employment, health, personal happiness, and many other things, has never been a guarantee.  In the absence of a government-mandated or operated retirement system, American workers must use the tools available to them.  Can we sharpen those tools, or add new ones to our tool kit to do the job better?  Yes.  But it’s important that we not fail to appreciate and properly use those tools available to us now, as we work toward perfecting them.

President Obama’s Retirement Saving Surprise

As the contents of President Obama’s 2014 fiscal year budget proposal were revealed, it became evident that it would break new ground with one of its provisions for retirement saving.  Most attention-grabbing was a plan for a per-taxpayer retirement accumulation cap, tied to a projected future benefit.  The motive for this is to generate revenue by limiting tax-advantaged saving.  Put simply, you or I would not be permitted to accumulate combined IRA and employer plan assets greater than an amount which—when applying an actuarial formula—would yield an annual payout at retirement age greater than the maximum that can be paid out from a defined benefit (DB) pension plan.  That limit is $205,000 for 2013.  The amount would be indexed to inflation, as is the maximum annual DB plan benefit. 

There are administrative complexities to this proposal, to be sure, such as determining when a taxpayer’s limit has been reached, the effects of investment gain or loss on contribution eligibility, consequences of breaching the cap with an otherwise-eligible contribution, and more.  But, beyond such details is the larger issue of the philosophy behind it, and the consequences—intended and otherwise—of such a proposal.  

Philosophically, should government be telling taxpayers how great or how limited their assets should be upon entering retirement?  Taxpayer circumstances differ greatly, as do their commitments, responsibilities and aspirations, both during working years and upon actual retirement.  The assets needed to meet these responsibilities and realize these aspirations must naturally differ, too. 

The counter-argument is likely to be that everyone is free to save as much for retirement as they are able to, but may have to do it without the benefit of a tax Code incentive, which tax-preferred retirement saving programs give them.  While this may sound reasonable, the reality seems to be that without tax incentives retirement savings suffer.   For example, many will recall the Taxpayer Relief Act of 1986 (TRA-86) and the restrictions it placed on Traditional IRA deductions.  Those participating in an employer-sponsored retirement plan, or who were married to someone who was,  had to consider their income when determining their eligibility for a deductible IRA contribution. IRA contributions fell by about 50% in one year starting with the first year tax incentives were not available.  This seems to be pretty clear and convincing evidence that tax incentives do matter.

While the TRA-86 changes resulted in less savings, at least the changes were prospective ones  that did not penalize taxpayers for past saving behavior.  The president’s proposal can be viewed as penalizing past behavior, in effect asking many who have saved diligently and invested well to recalibrate the vision they have for retirement.  While others who are similar in age, income, profession, or some other parameter can continue to save the maximum amounts permitted under the Internal Revenue Code, those with larger accumulations will be required to stop saving in a tax-advantaged manner.  The rules will have been changed in the “middle of the game” for many who have played the game fairly and well. 

There is also the matter of employer incentives for maintaining retirement plans, which benefit many thousands of rank-and-file workers who may never accumulate enough to be affected by the proposed cap.  When an employer reaches the maximum accumulation and must restrict future contributions, will he or she continue to sponsor a plan that only benefits the rest of the workforce?  And what about the loss of capital formation, which is the outcome of saving of all kinds?  While the largest share of U.S. retirement assets are now in capital-rich IRAs, the lion’s share did not originate as IRA contributions, but as contributions to employer-sponsored plans, whose balances were ultimately rolled over to IRAs.  The employer-sponsored plan is the goose that has laid many golden eggs.

It is unlikely that President Obama’s complete budget proposal will be accepted as-is, or will progress to legislation and become law in current form.  The Republican-led House and Democrat-led Senate have adopted their own budgets, neither of which matches the one proposed by President Obama.  Following hearings on the president’s budget by each body, compromise is inevitable if any budget resolution is to be adopted; there may not even be a consensus budget achieved this year. 

Nonetheless, laws begin life as proposals, and “parts” from multiple sources can become assembled into a legislative whole sometimes unrecognizable in its origins.  Not entirely unlike sausage making, as the saying goes.  Now is the time to make sure that the budget ingredients are not harmful to the mission of encouraging retirement saving.  Harmful, as we believe this particular ingredient to be.   

What Can We Expect From DOL’s “New Sheriff in Town?”

Whenever there is a change in the senior leadership of any organization, there is a period of uncertainty.  This is true in both the private and public sectors.  At such times it can be unclear whether the status quo will be maintained, or if major change in direction will occur.  President Obama’s recent nomination of Thomas Perez to succeed the departing Hilda Solis as Secretary of the Department of Labor (DOL) leaves my headline question unanswered for the moment.   

First, of course, comes Mr. Perez’ confirmation, and it is already clear that some Senators have a some concerns with him.  Perez currently serves as Assistant Attorney General for the U.S. Justice Department’s Civil Rights Division.  Among his critics, long-time Iowa Republican Senator Charles Grassley has threatened to oppose Perez’ nomination over allegations that he used his department’s influence to keep a potentially important housing discrimination case from going to the U.S. Supreme Court.  Others have expressed the opinion that he has leaned toward lax enforcement of immigration rules.  It remains to be seen how the nomination will proceed through Congress.

But what is of most immediate interest to the retirement industry is the direction that DOL may take on employee benefits in 2013 through 2016, during the remainder of President Obama’s second term.  Perez’ predecessor Solis’ pre-DOL experience included four terms as a California congresswoman, and featured a focus on labor issues.  Perez’ record of public service has had a focus weighted more heavily towards immigration and civil rights issues. 

This does not mean that he doesn’t or cannot grasp labor issues, but they do not appear to be his forte.  If this is an accurate assessment, then it would not be a huge surprise if Perez vision in a DOL leadership role—again, if confirmed—might logically be influenced by 2^nd term holdover Phyllis Borzi, Assistant Secretary for the DOL’s Employee Benefits Security Administration (EBSA).  I think it if fair to say that Borzi is considered to be among the more aggressive of recent EBSA leaders in advancing an agenda that places greater compliance demands on retirement plan sponsors and industry service providers.  For example, she is believed to be an advocate for a fairly broad definition of “fiduciary,” including applying these rules to the IRA environment, something that is an item of concern for many in the financial industry and on Capitol Hill.

It is not the case that retirement industry players are anti-compliance.  But there are fears that some of the directions EBSA might take would add compliance complexity and cost, without significant benefits to retirement plan participants—or IRA savers for that matter.  If Perez is confirmed, it is hoped that he will become familiar with the turf on both sides of the compliance fence, and will not adopt an adversarial and litigious attitude in the mistaken belief that this is in the best interest of U.S. workers and retirement savers.

Needed IRS Roth and ATRA Guidance

Whoever coined the phrase “the devil is in the details,” could easily relate to the uncertainty now facing the retirement industry following enactment of the American Taxpayer Relief Act of 2012 (ATRA).  Very few of ATRA’s provisions deal with retirement, but one issue is single-handedly making up in complexity and mystery what ATRA’s retirement dimensions lack in number.  Specifically Section 902, which allows pre-tax assets in certain employer-sponsored retirement plans to be converted to Roth status at any time, not just when they are distributable.  For those who may need reminding—and similar to Roth IRAs—the benefit of Roth-type assets in an employer plan is that they can generate tax-free earnings.

The Small Business Jobs Act of 2010 (SBJA), made it possible to convert pre-tax plan assets to Roth assets.  That legislation permitted a participant to convert pre-tax funds into Roth funds at such time as the participant was eligible for a distribution of that particular money type, or in other words had a distribution event .   For example, under SBJA a participant had to wait until age 59 ½ to convert his pre-tax deferrals to Roth assets.  ATRA now allows a participant to convert the pre-tax deferrals at any time, as long as the plan allows the conversion, even though there may not be an actual statutory distribution event for the money type.   

At first blush this new option seems an improvement over the old rules, which—due to their restrictiveness—did not generate much employer enthusiasm, or participant response.  Now, more participants may be able to more rapidly increase the volume of Roth-type assets in their accounts, which can be expected to yield more tax-free earnings.  What could be better than that?  Unfortunately, there are plenty of remaining uncertainties.  Until they are answered with IRS guidance, we would be surprised if a high percentage of plans adopt this option.  Here are just some of those questions.

Vested amounts only? Does the statute limit such conversions to vested amounts?  Industry interpretations differ but it appears based on the language of the statute that ANY amount can be converted, including non-vested amounts .  It is likely most would adopt a plan provision that would limit such ATRA-enabled conversions to vested amounts, as it is hard to imagine a participant being allowed to convert—and pay tax on—an amount, and subsequently have the risk of forfeiting it.  As this is something very new, guidance from the IRS as to how they view this is needed.

How to handle withholding?  The one unpleasant consequence of converting pre-tax assets to Roth assets is current taxation.  To avoid an under-withholding penalty, some taxpayers might prefer to convert less than the whole amount, and have some sent to the IRS as withholding to satisfy their anticipated tax obligation for the event.  This could readily be done with an in-plan Roth conversion under SBJA 2010’s rules, because only amounts eligible to be distributed could be converted.  Under ATRA, however, amounts NOT eligible for distribution CAN be converted.  Under ATRA’s rules, can an amount calculated to satisfy the tax obligation for the conversion be sent from the plan to the IRS as withholding, when the participant could not  take an actual distribution?   Our current interpretation is that it cannot be.  Based on this interpretation,  only participants who can satisfy the anticipated tax obligation by making an estimated tax payment from their non-plan resources may be in a position to take advantage of this option.  Or alternatively, individuals may be forced into numerous conversions, over different years to avoid excess income tax liability.   

Amendment guidance and timing?  Clearly understood is the general rule that plans must amend for a voluntary or discretionary change by the last day of the plan year in which the change occurs.  This would certainly apply to ATRA’s in-plan Roth conversion option, now available in 2013.  However, given the extent of unanswered questions, and the fact that IRS guidance is unavailable, flexibility to amend for a 2013 implementation by a more reasonable date is very important.  Without the expected IRS guidance in-hand when such an amendment is drafted there is a very real possibility that plans amending in 2013 could be required to amend a second time to shore up an amendment drafted prior to receiving IRS guidance.  We hope that the IRS will consider modifying the amendment deadline unless guidance is forthcoming very early in the year.

Disclosure of tax implications?  It is required that a notice of rollover options and tax consequences be provided to a plan participant or beneficiary when a distribution from a retirement plan is requested.  This is also true when an in-plan Roth conversion was requested under the provisions of SBJA 2010, because that conversion or rollover took place when the amount was distributable.  Under ATRA, a conversion may take place without a distributable event, so the detail provided in a typical distribution notice would appear not to apply.  However, given the tax consequences that could befall a plan participant or spouse beneficiary who executes an in-plan Roth conversion, one might expect that this information would have to be provided.  We hope the IRS will thoughtfully and adequately address this.

Motives and consequences?  The questions presented here are a sampling of some of important issues that should be addressed by the IRS, and soon.  Something beyond the IRS realm, however, is congressional motives.  The ATRA provisions permitting anytime conversion of pre-tax retirement plan assets were inserted into the legislation at the 11^th hour.  The purpose was to raise some $12.2 billion in tax revenues over the next 10 years, in order to offset the cost of other tax -related provisions in this “fiscal cliff” legislation.  This is the same strategy employed when Congress enacted the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), which offered special 2-year taxation in 2011-2012 for 2010 Roth IRA conversions.  The objective then was to generate tax revenues in 2010, through Roth IRA conversions, in order to pay for other TIPRA tax provisions. 

While it can be argued that some taxpayers will be better off with more Roth assets and their potential for tax-free earnings, this is not necessarily true for everyone.  Furthermore, neither the 109^th Congress nor the present one appears to have been motivated by the principle of enhancing retirement security.  It is also ironic that, with so much focus on the national debt and on balancing federal revenues with expenditures, this Congress traded away greater future tax revenues for lesser immediate tax revenues in order to avert the fiscal cliff.  That is called “kicking the can down the road.”  Hopefully, the IRS will not do the same with the ATRA guidance that is so much needed. 

U.S., Denmark Are Not a Good Retirement Saving Comparison

At a time when the U.S. retirement savings structure is a potential target for generating new tax revenues to balance the federal budget, the last thing  the industry needs is high-profile, big-name research that undercuts its value.  That is just what seems to have happened, with the release of a study authored by Raj Chetty and John Friedman of Harvard University, and several Danish counterparts.  Their study evaluated the effects of recent Danish tax changes that reduced retirement saving incentives for some workers.

Chetty and his fellow researchers drew the following conclusions. 

1.       The vast majority of workers are “passive savers,” meaning they do not respond to tax incentives.    

2.       Those who do respond to retirement tax incentives (the study determined it to be 15 percent) would still save without incentives, just in a different kind of savings vehicle.

3.       The net result is that for every dollar’s worth of tax incentives or subsidies provided to workers, total savings increased by only one (1) cent;

To their credit, Chetty and his fellows did also conclude that automatic contribution arrangements were likely to be the best answer to increasing U.S. savings rates, essentially forcing saving behavior on those who are unlikely to act on their own.

Before pointing out some very important differences between the Danish tax and social environments and those of the U.S., it is worth noting that this study has already been seized upon by some as a pat answer to the question of whether incentives increase real saving, or are worth the cost.  Perhaps worse, some are repeating the same inaccurate characterizations of the tax treatment of U.S. retirement saving.

For example, Boston College economist, professor and retirement researcher Alicia Munnell was quoted in her Encore blog, printed in the February 8^th Wall Street Journal Market Watch, as saying that “The federal government provides generous tax subsidies for retirement saving.  These subsidies cost the Treasury more than $100 billion annually in foregone tax revenues.”

It is one thing to question how effective the current system of employer tax deductions and employee tax deferral is in increasing saving.  It is quite another to say that their cost is $100 billion annually, and that the Treasury forgoes these revenues.  The impression left by such statements is that these are truly lost revenues.  This is hardly the case.  Using data from the IRS Statistics of Income compilations, in 2010 alone (the latest year available), some $753 billion—that’s with a “b”—in retirement assets were distributed from employer plans and IRAs and included in taxable income.  So, in most cases, taxation is delayed until a future date, not lost.  Delayed use is the whole point of retirement saving!

Those entrusted with making our laws and shaping and guiding our economy and social policy should be made aware, and take the time to inform themselves, that most amounts saved for retirement on a tax-advantaged basis do eventually generate taxes, and do not result in a permanent tax loss.  It is a peculiarity of the federal legislative scoring and budgeting process that revenue credits and debits are usually calculated over a very limited five-year window.  I believe this is an unrealistic snapshot of the net effect of retirement saving incentives on the federal budget.  But it has led far too many people to conclude—or to propose policy—on the premise that deferred taxation equals lost taxation.

The Employee Benefit Research Institute (EBRI), a well-respected industry analytics group, thoughtfully questioned the Harvard study’s conclusions about the importance of tax incentives in Denmark versus the U.S.  Here are just two EBRI observations.

Non-governmental retirement plans in Denmark are primarily established by worker unions, not by individual employers, as is the case in the U.S.  A reduction in tax incentives is unlikely to prompt widespread plan termination there, whereas American employers have repeatedly declared that meaningful tax incentives are central to their continuing to sponsor retirement plans.  Without a meaningful business tax deduction, and the opportunity for business owners themselves to save substantially in a tax-advantaged fashion, many employers are likely to conclude that the effort, expense and potential liability are not worth the trouble.  If this happens, few should doubt that a much smaller number of U.S. workers will be financially prepared for retirement.

EBRI indicated that a large and growing share of accumulated U.S. retirement assets will be spent on health care, whether it is in insurance premiums, co-pays, or out-of-pocket expenditures.  It is estimated that a 65-year-old U.S. couple retiring today will need roughly a quarter of a million dollars for health-related expenses over typical life expectancies.  This is over and above their living expenses, and that RV they envision purchasing to travel and enjoy their supposedly golden years.  As EBRI points out in its analysis of the Harvard study, Danish citizens have taxpayer-funded universal health care, so this potentially huge additional retirement expenditure is absent there.  The absence of this cost would seem to lead to a lesser sense of urgency when it comes to retirement savings.  As such, we believe that comparing the experience in that environment to the US is a comparison of apples to oranges.

Ms. Munnell and others are correct in suggesting that workers’ lack of responsiveness to saving opportunities argues for greater use of automatic enrollment in retirement plans, as well as automatic increases over time.  But without employer tax incentives to establish and maintain plans in the first place, the best guess is that there would simply be fewer plans in which to auto-enroll or to auto-escalate, and fewer employees prepared for retirement.