The ever-expanding debate on averting financial consequences has refocused attention on concerns that the coveted 401k plan and IRAs, long considered the last bastions of private retirement savings that replaced pensions for most working Americans, may be tapped. The plans may be slated for dramatic changes ranging from limiting deductions to retroactive taxation and to possibly include a nationalization scheme by imposing government-mandated plans on employers with savings allocated exclusively to Treasury bonds.
An Investment Company Institute study published last month illustrates that U.S. retirement assets at the end of second quarter 2012 total $18.5 trillion. Two components are $3.5 trillion in IRAs and $5.1 trillion in 401k plans. These therefore present very tempting deficit-funding sources for the Obama administration to help fund a spiraling budget deficit that is approaching $20 trillion.
By restricting the deductions of monies flowing into these plans for the highest wage earners or, as some reports have suggested, retroactively taking back already deducted amounts, plan assets could be reduced and resources effectively transferred through taxation back to government coffers to help pay down government debt.
In response to this threat The American Society of Pension Professionals and Actuaries has launched a national campaign to educate the public known as “Save Our 401Ks.” With over 11,000 member firms consisting of broker-dealers and retirement plan service firms, the campaign is part public lobbying effort and part public education effort.
Brian Graff, executive director and CEO of ASPPA, criticized Obama’s proposal to limit the tax benefit for retirement savings for families earning more than $250,000 and categorized it as “a bad proposal based on bad math.”
Graff went on to say, “The tax break for retirement savings is a deferral, not a permanent write-off. Under the president’s budget, these taxpayers wouldn’t just lose a current tax break, they would actually be penalized for saving – paying taxes now and taxes later.” This, Graff continues, “will discourage small business owners from setting up or maintaining retirement savings plans for their employees. Workers that lose workplace retirement savings plans will be the ones that really pay for this misguided proposal.”
Another organization, the Insured Retirement Institute, echoed these concerns.
They announced (though the administration’s proposal) “does not explicitly call for changes in the tax status of annuities for all,” there are serious concerns “including the elimination of certain tax incentives for retirement savings and new limitations on deductions for retirement contributions.” IRI is urging policy makers “to protect incentives in place for Americans to attain financial security in retirement, particularly by maintaining the tax-deferred status of annuities for everyone.”
IRI’s “research has shown that the tax-deferred status of annuities has been pivotal in helping middle-income Americans utilize lifetime income strategies as part of their retirement savings plan,” said Cathy Weatherford, IRI’s president and CEO, in a statement. “Removing this incentive would not necessarily increase tax revenue, but certainly would add a new barrier that would prevent Americans from attaining lifetime income coverage. With today’s unprecedented retirement challenges, now more than ever, we need to protect the incentives available to help Americans attain a financially secure retirement.”
The references that Graff and Weatherford make stem from ongoing discussions that are now becoming more relevant with the looming crises and that also includes a well-stated goal of the administration’s budget plan to force employers to offer “mandated” retirement plans. This discussion has been going on for some time though.
In 2010 Sens. John Kerry, D-MA, and Jeff Bingaman, D-N.M., proposed ideas that have been circulating in discussions and public hearings at the Treasury and U.S. Labor Department since, which has been endorsed in the Obama administration’s 256-page Budget Proposal For Fiscal Year 2013. The centerpiece is an “Automatic IRA” in which employers are directed to allocate an amount that equals 3 percent of a participating employee’s salary into a social security-type retirement plan that invests in U.S. treasuries and in which the federal government guarantees a 3 percent return. Even though tax credits to businesses would be provided for this scheme, the concern is that this would add an additional cost burden on small businesses that would restrict job growth.
With nearly half of 78 million workers in the U.S. without work-based retirement plans, a drive to equalize access to retirement assets funded by employers is now a distinct possibility.
With the uncertainty of the outcome of negotiations in coming weeks and with a vulnerable economy, the overall theme of government control over private retirement funds can fundamentally change how Americans save for retirement and this is unsettling for many savers and retirees.
Joe D’Amore lives in Groveland.