Among the many ideas offered on Capitol Hill to curb government spending and reduce the national deficit are proposals to limit tax deferrals for retirement savings. Considering the role that retirement savings play not only for individuals, but also in our capital markets, adopting these ideas would be a mistake.
Some in Congress view tax deferrals as “tax expenditures.” As a result, many of these tax provisions are on the table for potential cuts.
In recent months, two deficit commissions have proposed caps on the maximum amount of tax deferrals they would allow for retirement savings in employer-sponsored defined-contribution (DC) plans and individual retirement accounts (IRAs). But a new study by the American Society of Pension Professionals and Actuaries (ASPPA) reports that the real cost of retirement savings deferrals is actually 55% to 75% lower than that claimed by budget hawks.
In addition, reducing tax deferrals would undermine the progress that policy makers and the private sector have made in encouraging workers to take personal responsibility for their retirement savings. But national solvency and personal solvency complement each other. We should never pit them against each other.
Personal and workplace savings essential to national solvency
Workplace retirement savings are a priority for many Americans who are trying to meet their retirement savings goals in difficult times. They know that they may not be able to rely as much on government programs such as Social Security in the future. According to the ASPPA, 62% of these tax deferrals are going to workers earning less than $100,000 per year. It would be a terrible policy mistake to undercut the ability to save money in these investment vehicles.
In addition, retirement savings are a source of investment capital and job creation for private industry. As the United States moves slowly forward in its economic recovery, total retirement savings, which reached $17.5 trillion in assets at the end of 2010,* are more important than ever.
I believe that there is nothing more vital for our country than getting our out-of-control deficit back under control. But whatever we do to curb the federal deficit, we should never cut into incentives for personal or workplace savings. Deficits and debt are the problem — savings are a key part of the solution.
* Investment Company Institute.
