As Congress works to finalize what may likely be a temporary fix to the nation’s burgeoning debt problem, it seems clear that broader federal tax reform will be on the Capitol Hill agenda in 2013.
Even if policymakers successfully address the fiscal cliff in the short term, many of the programs and provisions that have yet to be changed or dismantled will be back on the table for the budget hawks to dissect.
That’s why we need to continue to remind policymakers about the importance of tax provisions for retirement savings plans.
The bottom line is that savings incentives are tax deferrals, not expenditures. Workers will pay income tax on those funds when they are withdrawn in retirement. Tax incentives for 401(k)s and IRAs are not part of the deficit problem. They are part of the solution for a sounder, investment-driven economy.
And savings incentives are valuable because they play a significant role in the success of retirement savers. According to research conducted by the Employee Benefit Research Institute (EBRI):
- Savings incentives help many workers trying to save for retirement. The majority of these savings advantages — 62% — go to workers earning less than $100,000 per year.
- If not for savings incentives, 56.7% of workers said they would save less.
- Limiting or eliminating incentives would result in a 6%–22% reduction in 401(k) balances for workers in the 26–35 age group.
- Without incentives, smaller business owners may be less inclined to offer workplace savings plans.
Access to workplace savings is vital for Americans to have a chance at success in meeting their retirement savings goals. EBRI notes that more than 71% of workers earning between $30,000 and $50,000 save for retirement, but only if they have access to payroll-deduction savings plans at work.
Savings advantages influence workers deciding whether they will participate in a plan and how much they will contribute.
As our nation’s leaders debate solutions to avert the fiscal cliff and move toward tax reform, we urge them to oppose any policy change that would undermine incentives for retirement savings.
Sources: EBRI, “The Impact of Modifying the Exclusion of Employee Contributions for Retirement Savings Plans From Taxable Income: Results from the 2011 Retirement Confidence Survey;” EBRI, “Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances;” EBRI (2010) estimate using 2008 Panel of SIPP (covered by an employer plan) and EBRI estimate (not covered by an employer plan – IRA only).