The Senate Finance Committee is proposing ways the tax system could be reformed to promote increased retirement savings and recently considered testimonies from multiple employee benefits and retirement experts.
One of the experts Judy A. Miller, director of retirement policy for the American Society of Pension Professionals & Actuaries, is concerned about the proposals because they slash the contribution limits, and turn this year's into a credit, which, she says, would discourage small-business owners from providing workplace retirement plan.
"The key to promoting retirement security is expanded workplace savings and increased incentives for small-business owners to sponsor retirement plans," Miller says. "We urge Congress not to dismantle what's working with our private employer sponsored retirement system to pay down the current debt and as a result put the retirement future of American workers in jeopardy."
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Karen Friedman, executive vice president and policy director of the Pension Rights Center, has both short- and long-term solutions for tax reform, with one short-term solution being an expanded and refundable saver's credit. To encourage low- and moderate-income workers to contribute to a 401(k) or IRA, the Internal Revenue Code includes a Saver's Credit, but it is quickly phased out, and taxpayers in these categories who do not pay income tax often are often not eligible for the credit.
Instead, the credit should be refundable, Friedman says, because that would allow those workers who contribute to a retirement plan to receive a check from the government to add to their account.
Friedman also suggests a reverse-match 401(k) plan. With this solution, an employer could first make a contribution to all plan participants as a percentage of compensation. Those participants who can afford to make contributions could match a multiple of the employer's contribution on a tax-deferred basis.
In the long term, Friedman believes a new system on top of Social Security is necessary. For the system to work, it must provide a retirement plan for every worker, secure retirement and adequate income. The new retirement system would also have to be a joint effort in which both employees and employers contribute while the government subsidizes contributions for lower-income workers, Friedman says.
According to Jack VanDerhei, Ph.D., research director of the Employee Benefit Research Institution, defined contributions especially need to be addressed. A worker's retirement future is strongly correlated to the eligibility of participating in employer-sponsored retirement plans. Thus, the idea of amending the incentive structure for both employees and employers regarding defined contribution plans should be taken into consideration.
"EBRI studies have documented that defined contribution plans are the component of retirement security that appears to be generating the most nonSocial Security retirement wealth for baby boomers and Gen Xers," VanDerhei says. "However, the potential increase of atrisk percentages resulting from employer modifications to existing plans, and a substantial portion of lowincome households decreasing or eliminating future contributions to savings plans as a reaction to the exclusion of employee contributions for retirement savings plans from taxable income, needs to be analyzed carefully when considering the overall impact of such proposals."
William Gale adds that the tax structure for retirement plans tends to benefit the wealthiest, which is a major fault. Because of the way the system is set up, wealthy workers are more likely to move existing assets into tax-protected accounts without increasing the overall savings.
Instead, Gale recommends trading in tax deductions for tax credits. This would make worker and employer contributions taxable, but with the credit being directed into an employee's retirement account, lower-income workers are more likely to increase contributions. For funds that lose its tax-exempt status, it could result in tax revenues of $450 billion over the next 10 years.
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