SAN ANTONIO, Texas – Regardless of which political party prevails in next month’s midterm elections, Democrats and Republicans alike understand that one sure-fire way to fatten the government’s wallet is by cutting retirement tax incentives.
That was one of the big points made Thursday by ERISA attorney Marcia S. Wagner, whose presentation at the Center for Due Diligence conference took on a foreboding air as she ticked off a long list of proposals by lawmakers at the federal and state levels that threaten the private retirement system.
The government’s influence on retirement could drive many advisors out the business, she said, warning of the potential for “great disintermediation” in the industry.
In the process, she said, government is likely to assume control over the selection of investment managers and will influence allocation of investment assets. As a result, she spoke of the increased possibility of asset misallocation, funding that favors certain industries, and a heavy reliance on government bonds.
“These are interesting times,” Wagner said. “How these issues play out can affect the retirement system for decades.”
The more immediate threat may be budget-related. “Deficit-reduction measures are going to have a big effect on retirement,” Wagner said. “Policymakers are aware how expensive the retirement system is.”
The Office of Budget and Management has estimated that the federal taxes deferred by defined contribution plans in 2015 alone are worth $61 billion. That’s why the private pension system is a target for reform, Wagner said.
One of the easiest ways for government to raise new dollars is to freeze DC plan limits until 2024. Doing so would generate more than $63 billion in revenues over 10 years. Billions of dollars more could be produced by mandating that half of all 401(k) contributions are treated as Roth account deposits, so that participants pay taxes on those dollars as they’re going into their accounts.
“These limits are not written in stone,” Wagner said. “They can be raised or lowered, based on societal needs.”
Chipping away at the tax incentives built into the system today would likely mean fewer new plans, she said. There’s also the potential that employers will terminate existing plans and the likelihood that their contributions will be cut.
Low-wage workers will doubtlessly set aside even less money for their retirement, while higher earners looking to shelter income from taxes will divert their dollars to insurance or tax-exempt bonds, she predicted.
“Tax reform could have the intended consequences of reducing budget deficits or the unintended consequences of shrinking the retirement system,” Wagner said.
Tax reform, she said, is inevitable at some point, if not next year, then perhaps 2016 or 2017.
The other threat to the private retirement system comes from public-sector efforts to set up competing or supplementary systems.
The current system covers less than half of workers, Wagner noted, and many in the workforce have not saved nearly enough to provide what might be considered adequate retirement income.
That has spurred lawmakers in Washington, D.C., and in state legislatures to get involved, “all to forestall an impending retirement crisis.”
The Obama administration has been pushing its auto IRA idea for several years. And more than a dozen states are at some stage of developing their own separate programs for private-sector workers.