Employees who earn less than $150,000 benefit the most from tax incentives they receive by putting money away in their employer-sponsored retirement plans.
Plan sponsors also receive a small benefit from the tax incentives, so why eliminate tax incentives as part of tax reform?
Those were the two big points made by Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, in a letter to the House Ways and Means Committee's Pensions and Retirement Tax Reform Working Group.
The Obama White House has proposed doing away with these incentives after individuals are able to stash away several million to help balance the federal government’s budget. But as Graff pointed out, being able to make pre-tax contributions to a retirement account doesn’t mean people won’t pay taxes on that money later.
Graff, eching a point he made at the time the proposal was unveiled earlier this month, said eliminating tax incentives could have a major consequence for small-business owners who offer retirement plans. Many might stop offering such plans, he said, because there is no incentive for them to do it. As has been documented for years, because defined benefit pension plans are going away, more people are relying on workplace-sponsored plans for their savings.
Any drop in tax incentives could have a ripple effect across the industry, Graff and others have said.
In his letter, Graff said that access to a retirement plan at work is the key to successfully preparing for retirement, so any modifications to the current incentives should be evaluated based on whether they will encourage more businesses to sponsor retirement plans for their employees.
“The current tax incentives for employer-based retirement programs have been very efficient at promoting retirement security for millions of working Americans,” he wrote. “If increasing retirement and financial security is the goal, increasing the availability of workplace savings is clearly the way to get there.”
ASPPA has found that more than 70 percent of workers earning between $30,000 and $50,000 a year will participate in a workplace plan, though fewer than 5 percent will save through an IRA on their own.
For those families with a retirement savings account, the median percentage of the families’ total financial assets held in these accounts is 65.7 percent, up from 59.6 percent in 2004.
Graff told the committee that the most effective way to expand retirement savings is to make payroll deduction savings available to most workers.
ASPPA supports auto-IRA proposals that would require employers that do not sponsor another type of workplace retirement plan to make automatic payroll deduction IRAs available to their employees.
The organization opposes proposals to expand coverage that includes mandatory employer contributions.
Businesses already contribute to Social Security and small businesses can’t afford another required contribution, it says. It says part-time employees also should have the opportunity to set money aside in a workplace retirement plan. They simply don’t have to be eligible for matching company contributions, which would limit the burden to employers offering the incentive for these employees, ASPPA says.
The group also supports a larger Saver’s Credit because it will help lower-paid workers to afford to save. If the credit were deposited to retirement savings accounts instead of refunded to the saver, it should also help supplement savings, it says.
Under the president's proposal, retirement accounts would be capped at about $3.4 million in a move that would raise $9 billion for the government over the next decade.
The cap would prohibit taxpayers from adding more tax-free money to their accounts once they’ve crossed that $3.4 million threshold.