ASPPA Finds “Faulty” Math in Retirement Debate

The American Society of Pension Professionals & Actuaries (ASPPA) says proposals to scale back or eliminate retirement savings tax incentives for 401(k) plans are based on misleading math.

ASPPA analysis shows the real cost of retirement savings tax expenditures to be 55% to 75% lower than  government estimates, meaning that proposed cuts will not save nearly as much as advertised even as they jeopardize the future of 401(k)s and other retirement plans, the group said in a press release.  

When evaluating the cost of the tax deferrals associated with defined contribution plans such as 401(k) and Keogh plans, the Congressional Joint Committee on Taxation (JCT) and the Treasury Department’s Office of Tax Analysis (OTA) both use current cash-flow analysis. Since workers withdraw money from these plans only in retirement, the taxes paid show up outside the 10-year timeframe used in cash-flow analysis, and therefore are “scored” as lost revenue, rather than deferred revenue. These tax deferrals differ from tax credits or deductions, such as those for medical expenses or mortgage interest, since the taxes deferred ultimately are paid.   

ASPPA said the faulty analysis dramatically exaggerates the real cost of the tax incentives for retirement plans. Using present-value analysis – which economists typically use for long-term analysis – economist Judy Xanthopoulos and tax attorney Mary M. Schmitt have calculated that present-value estimates of the five-year cost of retirement savings tax expenditure are 55% lower than those of the JCT and 75% lower than those of the OTA.   

“The federal government needs to put its fiscal house in order, but national solvency should not come at the expense of personal solvency. We should reduce neither the incentive workers have to save for their future nor incentives for companies to offer 401(k) plans to their employees,” said Putnam Investments President and Chief Executive Officer Robert L. Reynolds, in ASPPA’s statement.  

ASPPA’s report, “Retirement Savings and Tax Expenditure Estimates,” is here.