The Insured Retirement Institute is urging the Trump administration and Congress to tread lightly in considering tax reforms that would strip incentives to save in qualified retirement plans.

In an extensive letter to the Commerce and Treasury Secretaries and Republican and Democrat leaders on tax policy in both chambers of Congress, IRI says proposals that would limit the tax preferred treatment of contributions to employer-sponsored retirement plans would “risk significantly impairing retirement security” for the country.

“With 30 million Baby Boomers at risk of not having enough retirement income and 10,000 Americans reaching retirement age every day, it is vital that tax reform protect existing tax treatment and tax-deferred savings incentives that spur retirement savings and economic growth,” said IRI’s CEO Cathy Weatherford in a statement.

The White House is expected to release new details on its plans to reform the tax code this week. On the campaign trail, President Trump pledged to reduce the corporate tax rate to 15 percent, and the individual rates to 12, 25, and 33 percent. House Republicans’ Blueprint for tax reform would reduce the corporate rate to 20 percent.

Independent scores of Trump’s plan show it would cost about $6 trillion dollars over ten years, while the Republican plan would cost $2.3 trillion before accounting for potential economic growth.

If Republicans use budget reconciliation to pass tax reform, which would require only a simple majority in the Senate, the bill will have to be revenue neutral over 10 years.

Republicans are reportedly considering several proposals that would offset lost tax revenue by limiting, or under one plan, doing away with the tax-preferred treatment of deferrals to defined contribution plans. The non-partisan Joint Committee on Taxation says defined contribution plans will cost $583.6 billion in forgone tax revenue between 2016 and 2020. Traditional IRAs will cost $85.8 billion.

In its letter to lawmakers and administration officials, IRI, which represents the interests of insurance companies, said it supports tax reform in service of economic growth--but not at the expense of the incumbent tax incentives to save for retirement.

Policies that limit or abolish retirement savings incentives to make tax reform revenue neutral in a 10-year budget window could ultimately have negative long-term budget implications, says IRI.

“Tax-deferred retirement savings incentives are not a permanent exclusion from tax,” the letter says, citing data from the Congressional Budget Office showing that taxes paid on retirement income will boost tax revenue as a share of GDP by 0.3 percent over the next 30 years.

IRI also cites data from a number of studies, including one commissioned by the trade organization, that show tax incentives are a primary motivator for savers of all ages.

A recent report on the country’s defined contribution retirement system by BrightScope and the Investment Company Institute showed 80 percent of respondents said pre-tax treatment of 401(k) contributions are a “big incentive” to save for retirement.

Moreover, the existing incentives give employers further reason to offer and contribute to plans. In the BrightScope/ICI study, nearly half of respondents said they probably would not save for retirement if they did not have access to a retirement plan at work.

A 2016 IRI survey showed 25 percent of Gen Xers said they would be less likely to save for retirement if the tax deferral were reduced or eliminated. And a study by Gallup showed that 70 percent of respondents said they saved more for retirement because of tax incentives.

IRI argues that Roth accounts don’t provide sufficient motivation to save for retirement, because their tax value isn’t provided when it is most needed—during savers’ working lives when income, taxes, and expenses are higher than in retirement.

“Retirement security is too important for decisions to be based on a short-term need for revenue to pay for other, wholly unrelated matters,” IRI’s letter says.

The letter suggests that IRI does not see room for compromise between a plan that would fully eliminate tax incentives in retirement plans, and a plan that split deferrals to defined contribution plans between a pre and after-tax basis.

IRI’s wish list for tax reform includes policy proposals that it says would further stimulate retirement savings.

New tax credits to increase adoption of automatic enrollment in 401(k) plans, increasing auto-deferral rates to 6 percent of income, encouraging multiple employer plans, and providing plan sponsors with a new annuity-selection safe harbor are among the ideas that have bipartisan support in Congress, and would “significantly augment Americans’ retirement savings with very modest impact on (tax) revenue,” the letter says.

Instant Insights /

IRI wants tax reform, but not at expense of retirement plans

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