Federal tax subsidies for retirement savings should be redirected to get more people saving for retirement and other purposes, according to the Brookings Institution's Karen Dynan, vice president and co-director of economic studies.
Part of the think tank's Hamilton Project for rethinking the federal budget, Ms. Dynan's proposal, “Better Ways to Promote Saving through the Tax System,” calls for capping retirement tax deductions and exclusions at a 28% tax rate so federal tax incentives can be shifted toward lower-income earners.
Ms. Dynan also calls for providing more tax incentives for employers to offer retirement savings plans, including a bigger credit for startup costs, and an automatic individual retirement account program for employees.
But capping retirement savings deductions at 28% without factoring in the tax paid when the funds are withdrawn is double taxation for people above a 28% tax bracket, including small-business owners who offer 401(k) plans at work, said Judy Miller, director of retirement policy at the American Society of Pension Professionals & Actuaries.
“This double tax is going to discourage employers from investing in 401(k) plans,” Ms. Miller said in an interview. “And it's going to cause other people that are now in the system to lose out. They are picking winners and losers.”
Discouraging firms from establishing retirement savings plans or higher-paid employees from contributing to them “would be counterproductive,” Ms. Dynan agreed in an interview. “I proposed a moderate change because it does make sense to start modestly and see what happens.”
According to the Brookings/Urban Institute's Tax Policy Center, 84% of retirement tax expenditures went to people with incomes above $100,000, while less than 1% went to those earning less than $30,000.