Two studies question the efficiencies of tax incentives for retirement savings. The Brookings Institute rolled out the two studies that in part question this aspect.
The studies were released at a symposium hosted by The Hamilton Project, the arm of the Washington D.C.-based think tank that researches retirement policy.
One of those papers, "Ten Economic Facts About Financial Well-Being in Retirement," notes that tax breaks to promote savings account for the second largest federal tax expenditure, behind only tax breaks for employer-provided health insurance.
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Those savings incentives meant $95 billion that didn't go to government coffers in 2014, according to data from the Joint Committee on Taxation 2014, which was cited in the paper.
Half of the tax breaks went to employer-sponsored defined contribution plans. Roth and Traditional IRAs accounted for $17 billion in tax breaks. Defined benefit plans received $26 billion in 2014.
Those tax "expenditures" disproportionately benefit the wealthy, according to the Brookings paper, which also cites data from the Congressional Budget Office showing the wealthiest one-fifth of earners get 66 percent of the tax breaks.
"Research suggests that these subsidies generate little additional retirement savings because households reallocate to tax-preferred accounts the savings they would have accumulated anyway," according to Brooking's paper.
Another paper released at the symposium, at which Labor Secretary Thomas Perez gave the keynote address, calls on Congress to scrap all existing tax-preferred retirement savings plans and replace them with a single plan, the Universal Retirement Savings Account.
The savings plan would follow workers throughout their careers, and incentivize employers with a tax credit for every worker that deferred at least 3 percent of earnings. Deferral rates would increase 1 percent annually, be capped at 8 percent, and sponsors' tax credits would increase accordingly.
Only $35,000 of worker and sponsor contributions would be tax-deferred, as opposed to current maximum of $53,000.
John Friedman, a Brown University economist and author of the paper, also envisions a scenario where Congress allows post-tax contributions, as with Roth IRAs and Roth 401(k) plans.
Annual contributions would be limited to $25,000, and participants would pay some capital gains taxes on the money they draw down from the accounts in retirement.
Limiting contributions and tax incentives would only affect the wealthiest savers, according to Friedman's research, as only 1 percent of savers defer more than the new limits he proposes, and they are "almost exclusively from the top 5 percent of the income distribution."
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
