Despite the growing drumbeat in Washington to stimulate more retirement savings, the prospect for real change is dim, and retirement plan sponsors are braced for more bad news from Congress and the White House.
The next delivery will come in early March, when President Barack Obama unveils a 2015 budget that is expected to propose curtailing the tax advantages of workplace retirement savings for higher-income earners, in a bid to direct more of the tax preference for retirement savings to getting more low- and middle-income people into the habit of saving.
Like his 2014 budget, Mr. Obama's 2015 version is likely to limit the value of all tax deductions, defined contribution exclusions and IRA deductions to 28% of income — and include an overall cap on all retirement accounts, including pensions, that could bring in $1 billion per year in new tax revenue.
Based on current tax brackets, the 28% limit would reduce the tax advantages of retirement savings for people earning more than $183,000 or couples earning more than $225,000. The overall cap for all tax-preferred retirement accounts would limit them to providing an annual retirement income of $205,000, which would currently cap tax-preferred accounts at $3.4 million, but could go lower as interest rates rise.
Going by the last two budgets, Mr. Obama could also repeat his call for $25 billion more in federal revenue from corporate pension plan sponsors in the form of higher Pension Benefit Guaranty Corp. premiums.
The objective of these expected proposals, Mr. Obama said in his Jan. 28 State of the Union address, is to “fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle-class Americans.” To help lower-income workers save for retirement, Mr. Obama unveiled a new “MyRA” retirement savings program (Pensions & Investments, Jan. 28).
The prospect of new tax treatment for retirement savings concerns public pension industry officials. As a shift to defined contribution plans forces public employees to take a greater role in contributing to and managing the investment of their own retirement assets, diminishing the current tax treatment “creates further risks for the retirement security of both the public and private workforce,” Tom Mueller, president of the National Association of Government Defined Contribution Administrators, wrote to members of Congress in 2013. He didn't return phone calls for this story.
Curbing retirement tax incentives for high-income taxpayers is also a priority for Sen. Ron Wyden, D-Ore., new chairman of the Finance Committee, who would like to simplify the current system of tax-preferred savings incentives. But with a two-year federal budget already approved and midterm elections looming, the prospect of big tax changes for retirement savings this year is dim.
“It's a political talking point, but it's not a real thing,” said Howard Gleckman, resident fellow at the Tax Policy Center in Washington, a joint venture of the Urban Institute and the Brookings Institution.
A more immediate concern
The more immediate concern in Congress is how to pay for some of the pressing big-ticket items like unemployment insurance and Medicare fixes, and politically attractive moves like repealing military pension cuts. As Congress takes up those issues, the trick is providing “pay-fors” to offset their price tags.
That's what really has retirement experts on guard. “Pension plans have been viewed recently as easy sources of revenue,” said Donald Fuerst, senior pension fellow at the American Academy of Actuaries in Washington.
“It would be much better to take a holistic approach, but instead, what we get are things that are very much driven by revenue,” said Alan Glickstein, senior retirement consultant at Towers Watson & Co. in Dallas. “That does not bode well.”
Robert Holcomb, executive director for legislative and regulatory affairs for J.P. Morgan Retirement Plan Services, Kansas City, Mo., expects the revenue hunt to focus on Roth IRAs, and making it easier to convert to them, within a plan, from accounts that currently defer tax payments. The account holders would have to pay income taxes at conversion, which would produce tax revenue. They then would pay no taxes when withdrawing the money in retirement. “Over and over we've seen Congress return to Roth as a potential pay-for. That's one thing that we'll be keeping an eye on,” Mr. Holcomb said on a Feb. 13 briefing call.
Another federal revenue-raising idea being considered in Congress is more pension funding relief, which was first used to pay for highway funding in the Moving Ahead for Progress in the 21st Century Act of 2012. Reducing required minimum pension contribution requirements for corporate plan sponsors would result in more taxes on the corporations, increasing federal tax revenue collections, at least on paper.
Smoothing touted as boon
The concept — known as pension smoothing because it lets plan sponsors stretch their contributions over more years by using higher rates to value funding obligations — is touted on Capitol Hill as a boon to plan sponsors. But it only helps those who find the short-term fix worth the effort.
It is also getting criticized by both the political right and left as a budget gimmick. While it reduces the amount of tax-exempt pension contributions made for a while, “you are just changing the timing of when (sponsors) pay taxes,” said Ed Lorenzen, a senior adviser with the Committee for a Responsible Federal Budget, a Washington group of congressional budget process veterans.
According to the Congressional Budget Office, every dollar saved in pension contributions means 25 cents more in taxes paid by corporations on average. “When you have something that works on paper without actually taking away anything from anybody, it is going to appeal to Congress,” Mr. Lorenzen said.
PBGC premium hikes
What did hit all defined benefit plan sponsors was MAP-21's PBGC premium hike to produce $9 billion in federal revenue. That was followed by a second PBGC premium hike in December 2013 to bring in another $8 billion in revenue to close a federal budget deal.
That budget deal did not address the PBGC's estimated $36 billion deficit, and using the higher premiums to pay for other federal budget items won't help, said Rachel Greszler, a senior policy analyst with the Heritage Foundation in Washington.
With the PBGC multiemployer program in the deepest fiscal hole, raising single-employer premiums at all “is effectively forcing the financially sound pension plans to pay for financially unsound pension plans because PBGC could in theory tap those premiums and in effect translates into private-employer plans paying for multiemployer plans,” Ms. Greszler said. (Current law does not allow the PBGC to use single-employer premiums for the multiemployer program.)
If the president brings up PBGC premiums again in his new budget, “it's just money on the table, asking for (Congress) to take it,” said Deborah Forbes, executive director of the Committee on Investment of Employee Benefit Assets, Bethesda, Md., which represents the 120 U.S. companies with the largest U.S. corporate pension funds that control more than $1.5 trillion in retirement plan assets.
This article originally appeared in the February 17, 2014 print issue as, "Companies bracing for 1-2 retirement punch".