SAN ANTONIO – Politics aside, tax reform is coming and it could well mean an overhaul of the pension system – including a government takeover.
That was the word Monday morning from noted retirement industry attorney Marcia Wagner, delivering the opening keynote as the 2013 Center for Due Diligence annual conference got under way here.
“We’re in a material year for ERISA,” Wagner told the audience. ”We’re at the beginning of a national debate about the nature of retirement. There are two streams being debated: tax reform and pension structure reform.
“The question is which will we have, and to what extent?” she said. “The answer will impact your livelihoods and the very nature of retirement.”
Wagner, a former Harvard economics instructor whose clients have included the Mariana Islands, said the country is experiencing a retirement “catastrophe, slow-mo,” and can no longer afford to leave these questions unaddressed.
“The easiest way (for legislators and policymakers) to deal with budget issues with respect to retirement plans is by raising and lowering the limits as societal needs dictate,” she said.
The needs today, of course, are great, in light of the nation’s swelling debt and so-called retirement crisis. The amount of “forgone” tax revenue attributable to 401(k) plan contributions between 2011 and 2015 has been estimated at $361 billion.
“This makes 401(k) plans an easy target for revenue-raising initiatives,” Wagner said.
That explains the origin of one of several ideas to have surfaced lately: the Obama administration’s proposed cap of $3 million on retirement accounts.
“It has a lot of legs,” Wagner said, though industry opposition to the notion is high.
The Obama administration also has proposed what’s being called the Buffet Rule, a tax reform that would impose an 11.6 percent tax on employer and employee plan contributions on high earners only.
Among other proposals getting attention and more likely to gain traction:
- The National Commission on Fiscal Responsibility and Reform’s 20/20 cap, which would limit retirement account contributions to the lesser of $20,000 or 20 percent of compensation.
- A Brookings Institution proposal to tax all employer and employee retirement account contributions and provide a refundable tax credit deposited to retirement savings account.
Wagner sketched out several other leading pension reform proposals, including the Secure Plan Proposal, offered by the National Conference on Public Employee Retirement Systems.
The idea is to create state-sponsored cash balance plans for private-sector employees. What is undoubtedly the most controversial aspect of the proposal would leave states on the hook for funding shortfalls.
Still, “it’s getting tremendous traction,” Wagner said of the notion, in part because it would relieve employers of pension plan obligations.
Along these lines, she said, “states are beginning to be the incubators of change,” adopting measures aimed at addressing the nation’s unfolding retirement crisis.
In California, for example, a law awaits regulatory that would require employers with five or more workers to establish a mandatory payroll deduction in auto-IRA programs.
At least 11 other states, Wagner said, are talking about pension plans for private-sector employees.
“States are re-asserting themselves in the retirement world,” she said.
Often, she said, auto-IRAs and similar proposals are getting bipartisan support, despite an aspect of government “intrusion” anathema to conservatives.
“Many of these concepts were jointly developed by liberal and conservative think tanks,” Wagner said. “John McCain had this (the auto-IRA idea) as part of his plank when he ran for president. … It is not dead, no matter how many people tell me it is.”
That said, some compromise will no doubt be necessary, given the GOP’s resistance to government mandates in general. Democrats, meanwhile, are concerned about making Wall Street rich, suggesting instead the government should perhaps manage these accounts, not the private market.
“(But) don’t let these big, philosophical divides fool you,” Wagner said. “You get rid of some of these mandates, and this could all become real.”
She also outlined U.S. Sen. Tom Harkin’s proposal to reform the pension system, a universal and mandatory approach he calls USA Retirement Funds. The Iowa Democrat’s idea includes auto enrollment, minimum contributions by both employees and employers and a restriction barring lump-sum withdrawals. The system would be run by private money managers that operate exchanges regulated by the government.
Offering some competition, another senator, Utah’s Orin Hatch, has pushed the SAFE Retirement Act, which includes a proposal that Wagner called “pretty ingenious,” in that it would create mini-annuities funded by every year of work.
The “showstopper” of Hatch’s proposal, Wagner said, is a measure that would allow state and local governments to purchase a deferred fixed-income annuity contract with the government employer’s annual contribution on the participant’s behalf.
There’s a measure of resistance from various quarters to any number of features in all of these proposals. Regardless, Wagner remains confident change is coming.
“I’m positive we will have tax reform and equally positive that part of it will include pension reform,” she said.
“What surprises me is that I have to go to a lot of conferences, and what I don’t hear being talked about is what I’m talking about here. Huge, tectonic shifts are happening and they’re not being talked about.”