The government should limit contributions or accumulations in tax-advantaged retirement plans—or tax the earnings each year—to address Social Security’s shortfall, a trio of high-profile industry academics argue in a new paper. It’s the latest in a string of controversial ideas that 401(k) proponents say could threaten the viability of the nation’s private sector retirement savings system.
Like the Retirement Savings for Americans Act (RSAA), a bicameral, bipartisan bill to give uncovered private-sector workers access to a federal retirement plan, the idea is likely to receive a strong response from supporters of defined contribution plans. It’s especially true given the recent passage of SECURE 2.0 and efforts to increase coverage at the state level, provisions that are designed to close the nation’s savings gap.
“Talk about robbing Peter to pay Paul,” American Retirement Association CEO Brian Graff said of the proposal. “It’s absurd to take away the incentives from a system that’s actually working to give money to a system that has fundamental challenges.”
The authors—Andrew Biggs, Alicia Munnell, and Michael Wicklein—admit that gaining political support would be difficult, yet nonetheless point to what they say are the subsidies' high cost to taxpayers.
“Tax expenditures for employer-sponsored plans are expensive—costing about $185 billion in 2020,” they write. “And, strikingly, they appear to be a very bad deal for taxpayers. The current tax preferences primarily benefit high earners, and the tax expenditure has failed in its broader policy goals of increasing national saving or expanding plan coverage. Therefore, the case is strong for curtailing these tax breaks.”
When asked about the idea’s genesis, Munnell, Director of the Center for Retirement Research at Boston College, said the tax preferences have annoyed her since her time at the Federal Reserve in the 1980s.
“We’re not persuaded that coverage is higher because of the tax incentives, and the incentives do go primarily to higher income people,” she claimed. “Very few lower-income people are covered by retirement plans, and they don’t pay much in taxes anyway.”
Yet the argument that the current retirement system overall, and tax incentives especially, benefit the rich is routinely addressed, most recently by Peter Brady, the Investment Company Institute’s Senior Economic Advisor for Retirement and Investor Research.
“There’s a small percentage of people that replace a very high percentage of their retirement income [with Social Security],” Brady said. “We can look at those people and see if there are issues, but there’s not a widespread retirement crisis.”
Biggs did note that while he believes tax incentives don’t have much of an effect on encouraging individuals to save, it’s not “crazy” to argue they “encourage businesses to offer 401(k)s and in doing so makes them more available to lower-income people.”
Both Munnell and Biggs mentioned the auto-enrollment’s effectiveness in plan design, something included in SECURE 2.0 legislation, and pointed to the United Kingdom’s National Employment Savings Trust (Nest) pension scheme as an example of its success.
“I’m a great fan of auto-enrollment and putting people where they should be and having them save that way. I don’t think you need this added tax incentive for all this to happen,” Munnell said. “[If] coverage is your thing, you can do what the U.K. does and say every person has to enroll their employees in NEST or introduce their own plan. So, if coverage is the thing, then there are cheaper and better ways to do it. If saving is the goal, it’s not happening. I would move that money to a place where it could be employed productively.”
“I’m not somebody who panics if not every American saves for retirement, but if a big concern people have is that not enough Americans either offer a retirement plan or participate, something like the U.K. structure is how you do it,” Biggs added. “It’s far cheaper, and it’s far more effective.”
