Last week, lawmakers began the intricate process of parsing which itemized deductions in the tax code could be used to pay for lower individual rates under tax reform, as the Senate Finance Committee held the first of what is expected to be many hearings on how to deliver middle-class tax relief.

The committee was divided over proposals that would eliminate state and local tax deductions and cap mortgage interest write offs.

But one proposed pay-for evoked bipartisan skepticism.

The so-called Rothification of the country’s retirement system would eliminate or cap deductions on contributions to workplace retirement plans and IRAs.

Withdrawals on Roth accounts are made tax-free in retirement. Withdrawals on traditional 401(k)s and IRAs are taxed as regular income in retirement.

Requiring all or some portion of retirement contributions to be made on an after-tax basis would bring hundreds of billions in tax receipts into the 10-year budget window.

“You gotta be kidding me,” said Sen. Sherrod Brown, D-OH. “The two best ideas to pay for massive tax cuts for Wall Street are to cut Medicare, raise the eligibility age to 70 for Social Security, and then steal from the retirement accounts of working middle-class Americans?”

The White House has not publically said that it intends to address Medicare and Social Security solvency through tax reform.

To the contrary, President Trump has sent strong signals that he will kick the can down the road on Social Security, to the dismay of fiscal conservatives.

Brown’s commingling of the private retirement system with entitlement programs is telling, even if his characterization of the White House’s ambition on Social Security reform is not accurate.

It signals that the progressive wing of the Democratic party is prepared to go to the mat to preserve tax incentives to save in workplace retirement plans.

The Rothification of the country’s retirement system would be tantamount to “slapping taxes on retirement savings of working middle-class families,” said Brown.

Ironically, Brown’s sentiment is in lockstep with the Wall Street interests he criticized. Fidelity, The Capital Group, and other asset managers of retirement savings are part of the Save Our Savings Coalition, which is lobbying to block Rothification.

Other committee Democrats voiced concern over Rothification during the hearing. Senators Ron Wyden, D-OR, the ranking member of the Finance Committee, Debbie Stabenow, D-MI, Ben Cardin, D-MD, and Bob Casey, D-PA, joined Sen. Brown in co-signing a letter to the White House and leaders in both parties, urging that Rothification be pulled from tax reform debate.

“Tax reform should increase working families’ take-home pay, encourage savings, grow jobs and the economy, reward companies that invest in American workers and their communities, and maintain sound fiscal policy. So-called ‘Rothification’ of retirement savings fails that test on all counts,” the Senators wrote.

Republicans, tax experts also dubious of Rothification

Three of the four witnesses before the committee were tax policy experts. Each testified that Rothification has the potential to negatively impact retirement savings rates.

“If one were to have such a dramatic change in retirement policy you would want to have a group like the Joint Committee on Taxation estimate what the affects would be on savings rates,” said Lily Batchelder, a professor of law and policy at NYU. She previously served on the National Economic Council in the Obama White House, and as the chief tax counsel for Democrats on the Senate Finance Committee.

Alex Brill, a fellow at the American Enterprise Institute, a conservative think tank, underscored the value of tax policies that promote retirement savings. “These policies are critical for the long-term economic viability of the country,” he said.

In questions from Sen. Rob Portman, R-OH, Brill acknowledged that the impact of Rothification on savings rates is uncertain.

He too called for further study on the issue. “Policy makers should be cautious,” said Brill, who previously served as the chief economist on the House Ways and Means Committee.

The witnesses also raised concern that using Rothification to move tax receipts into the 10-year budget window would have a long-term negative impact on budget deficits.

“It would raise a lot of revenue within the budget window and lose a tremendous mount of revenue outside the budget window,” said Batchelder, who cautioned against using Rothification as a “budget gimmick” to pay for tax cuts.

Instant Insights /

On Rothification, industry finds friend in Wall Street foe

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