Dr. Jack VanDerhei, Research Director of the Employee Benefit Research Institute (EBRI), was one of the speakers at the hearing. VanDerhei said that if the existing level of allowable tax-deferred savings in private-sector 401(k)-type defined contribution retirement plans is changed, as some advocates have proposed, “highest-income workers generally would be the most affected if federal tax limits in 401(k) type plans were lowered. But the surprising result we found is that the lowest-income workers would also be very negatively affected, and many report that they would reduce contributions or stop saving in their work-based retirement plan entirely, if the current exclusion of worker contributions for retirement savings plans were ended.”
VanDerhei also laid out detailed arguments against a proposal put forth by Brookings Institution Fellow William Gale, who also spoke at the hearing. According to EBRI, Gale’s proposal would replace existing 401(k) tax deductions with a flat-rate refundable credit that would serve as a matching contribution in a retirement savings account, using either an 18% credit or a 30% credit.
EBRI believes that Gale’s analysis assumes that workers will keep their aggregate retirement contributions constant and that employers will not make changes in their employer match in 401(k) plans. Under any cost-benefit analysis, VanDerhei said, it is very difficult to determine how workers not currently covered and/or participating in a defined contribution plan will react to the incentives under the Gale plan.
Representing the American Society of Pension Professionals and Actuaries (ASPPA) was Director of Retirement Policy, Judy A. Miller. One of her messages to the Senate Committee on Finance was that the true cost of defined contribution tax incentives to the country has been overstated: “Current budget rules require that the cost of most tax incentives be determined on a cash flow basis. Because the tax incentive for retirement savings is a deferral, not a permanent exclusion, basing the cost on current cash flow analysis – taxes not paid on contributions and investment earnings for the current year less taxes paid on current year distributions – misrepresents the true cost of the retirement savings incentives. Using a present value method, which recognizes that taxes will eventually be paid on distributions, produces very different estimates – more than 50% lower than [Joint Committee on Taxation] or Treasury estimates for a 5-year budget window.”
Calling the private employer-based retirement system “the greatest wealth creator for the middle class in history,” ranking committee member Orrin Hatch (R-Utah) opened the hearing with some very optimistic statistics: “The Social Security Trust Fund holds $2.6 trillion in Treasury securities. But private, employer-based defined contribution plans hold $4.7 trillion. And IRAs hold even more: $4.9 trillion.”
Senator Hatch said there is still room for improvement with 401(k)s and IRAs, yet he is discouraged by several proposals that have been recently introduced: “[A]ll of the reforms I read about lately seem directed toward reducing the amount of money that people may set aside in defined contribution plans and IRAs. For example, the National Commission on Fiscal Responsibility recommended capping pre-tax contributions at $20,000. The Congressional Budget Office, or CBO, describes a proposal to reduce annual contributions to 401(k)-type plans by $7,650 for older workers, largely by repealing the ability of workers at age 50 to begin making catch-up contributions. IRA contributions also would be cut by $1,500 for older individuals.
“Many of these proposals are offered in the name of greater progressivity in the tax code, and helping lower wage workers. But this just doesn’t make sense. Trying to help lower wage workers save for retirement by reducing the 401(k) and IRA contribution limits is like trying to cure a headache with a guillotine. The cure is worse than the disease.”
The Senator also remarked that Congress has already been down this road – but moving in the other direction. In 2001, Congress increased the amount a participant is allowed to contribute to a 401(k) plan.
Committee member Max Baucus (D-Montana) also spoke at the opening of the hearing. He sees two areas of gravest concern – Americans are simply not saving enough to last throughout their retirement, and half of Americans don’t even have access to an employer-sponsored retirement plan.
Complete statements from Senators Hatch and Baucus, as well as from EBRI and ASPPA, are available on the Committee’s Web site at http://finance.senate.gov/hearings/hearing/?id=ba387157-5056-a032-5252-c7bf71fc6c90.