Health, retirement benefits positioned as dangerous tax targets

Image credit: Sujin Jetkasettakorn Image credit: Sujin Jetkasettakorn

In a world where middle class American families have effectively made zero economic progress in a decade, many are waiting for the next shoe to drop - as governments also try to figure out how to make more tax income from those embattled average workers.

That precarious climate has led many politicians to begin pointing a finger at the tax preferences that help support the limited benefits many American workers enjoy - namely their ever-dwindling employee-based health care and their retirement plans.

The Employee Benefit Research Institute recently convened to look at those issues and the potential clawbacks of the tax incentives that have made those programs remain attractive to employers, even in these increasingly tough times.

"'After' Math: The Impact and Influence of Incentives on Benefit Policy," gathered a range of experts to discuss some of the likely issues as government leaders begin to realize the larger costs of those tax incentives and begin to shine a spotlight on them as easy targets for what might just be short-term government spending savings.

And the impact could be gigantic, as many of the forum's attendees noted. Employment-based health care benefits already cover nearly 70 percent of working adults, and the combined assets in employment-based DC and DB plans add up to more than a third of the retirement assets in the U.S. - IRAs making up another third.

It's the labels that cause even more potential problems. Private-sector health benefits are ranked as the largest single tax expenditure in the federal budget, and that can send up a huge red flag to elected officials looking for an easy way to make cuts.

"When you look at some of the recent proposals for reform, benefit plan tax incentives are an area of total and complete volatility, and neither employers or workers can have any certainty of what lies ahead," said Dallas Salisbury, president and CEO of EBRI.

The short-sightedness of some of those reform proposals is becoming increasingly clear, forum presenters noted. For instance, those leaders hot to jump on the alleged tax losses from tax-deferred retirement accounts fail to consider that the benefits are just that, deferred - and the government will eventually recoup the losses.

Even the math used may be wrong, experts say. There's a huge difference between tax expenditure estimates and revenue estimates - revenue estimates incorporate taxpayer behavior, and tax expenditures do not.

"The agents in the system - your doctor, your employer, your insurance plan - they're not communicating with each other," said, Joe Antos, Wilson Taylor Scholar in Healthcare and Retirement Policy at the American Enterprise Institute. "And as a result, you - the person who ultimately cares about this - do not benefit from the potential agency relationships that ought to exist, but effectively do not."

Consider also that the volume of taxable activity in IRAs is also heavily weighted on seniors and not on people who are still in their working years: 80 percent of those making withdrawals from their IRAs are 71 and over, while less than 10 percent of those aged 55-60 are doing the same.

Those missing out on the long-term nature of deferred benefits also need to consider that pre-retiree balances in DC plans have -at least up until the last three volatile years of low returns - tended to double every eight or nine years.

In the meantime, the forum suggested more gentle but informed pressure be placed on workers to actively participate in the retirement savings programs available to them and to do whatever possible to minimize savings "leakage" before retirement - perhaps easier said than done.

As a tangible benefit, automatic enrollment in retirement plans has also been shown to be a significantly important way to promote involvement, especially among younger employees. 

“We all know that if we can get people in the plan, get them contributing at an appropriate rate and make sure they're diversified, they're going to have a better chance of really garnering the income they need in retirement,” said forum participant Laurie Nordquist, director of Institutional Retirement & Trust at Wells Fargo. “From a plan-design standpoint, automatic enrollment and managed investment accounts can really impact the plan, but they impact different groups differently.” 

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