The ERISA Industry Committee issued a statement to the Senate Finance Committee urging lawmakers to be "wary of unintended outcomes in considering changes to the tax rules for retirement savings."
Finance Committee Chairman Ron Wyden, D-Ore., set a strong tone at Tuesday's hearing with his opening statement, suggesting tax reform of IRAs is necessary to reform retirement policy.
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"Take a look at the state of retirement savings in the U.S., and it's clear that something is out of whack," Wyden said. "The American taxpayer delivers $140 billion each year subsidizing retirement accounts, but millions of Americans are nearing retirement with little or nothing saved. The incentives for savings in the tax code are not getting to the people who need them."
Wyden cited a study by the Government Accountability Office commissioned by the Finance Committee.
Using 2011 tax data, the GAO found that more than 600,000 taxpayers have individual IRA accounts worth more than $1 million.
An estimated 8,000 taxpayers hold accounts worth more than $5 million, and several hundred account holders have IRAs worth more than $25 million.
The GAO found that, when assuming assets aggregated from maximum contributions sustained over decades in an employer-sponsored plan, and then rolled-over into an IRA, that an unusually "aggressive stock market investment strategy" was necessary to accumulate an IRA balance of more than $5 million.
The study also found that individuals who made the maximum contributions to an IRA since 1975 would have accumulated about $303,420, if the account returned the average annual Social Security interest rates.
The study's bottom-line: it is highly unlikely the wealthiest IRA accounts were grown from the limited salary deferrals, employer matches and individual contributions.
Sen. Wyden said the largest IRA accounts are used as a tax shelter.
"Executives buy stocks at a special, rock-bottom price — sometimes fractions of a penny per share — and use an IRA as a tax shelter. The stocks start out dirt cheap, but just like that they turn to gold, and the IRA shoots up in value," argued Wyden.
The result is billions in lost tax revenue. While Wyden pointed out that the shelter tactics are not illegal, he did suggest reform was needed.
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"IRAs were never intended to become tax shelters for millionaires — they're designed to help typical Americans save for retirement," he said.
But creating universal changes to the tax incentives of IRAs could have unintended consequences, according to Kathryn Ricard, vice president for retirement policy at ERIC.
"Changes to the rules for retirement plans often result in a 'chilling effect' on savings even by individuals who are unaffected by the rules change," Ricard said in ERIC's statement to the Finance Committee.
She suggested that Congress address policy changes that will incentivize savings, rather than ones that focus on raising tax revenue.
"ERIC urges Congress to recognize that any changes to retirement savings incentives must focus on policy that will result in better long-term retirement outcomes for Americans, rather than on short-term deficit reduction," Ricard added.
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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.
