Meanwhile, the Joint Committee on Taxation, a congressional panel led by House Ways and Means Committee Chairman Dave Camp, R-Mich., dangles the prospect of $16 billion in new revenue over five years by limiting contributions to $14,850 for 401(k) plans, capping all of a participant's contributions to a single deferral limit, instead of having one limit for each 401(k), 403(b) and 457(b) plan, and eliminating catch-up contributions, among other measures analyzed by the Congressional Budget Office.
Retirement savings incentives are getting a lot of attention because they're one of the most expensive for the federal government to provide, right after mortgage deductions and health-care exemptions. The CBO estimates that keeping them will cost $600 billion over the next five years, led by 401(k) contributions, which will result in an estimated $67 billion in lost revenue in 2012. The Gang of Six — Democratic Sens. Kent Conrad of North Dakota, Richard Durbin of Illinois and Mark Warner of Virginia and Republican Sens. Mike Crapo of Idaho, Tom Coburn of Oklahoma and Saxby Chambliss of Georgia — proposes raising $1 trillion by reducing a variety of tax incentives, including for retirement savings.
Retirement experts warn that budget negotiators are missing the point by removing such savings incentives. “It is important to remember that unlike other government tax expenditures such as health-care or mortgage exemptions, tax preferences for retirement savings are actually deferrals — those savings are ultimately taxed at the time of distribution,” Robert A. Holcomb, executive director of legislative and regulatory affairs for J.P. Morgan Retirement Plan Services LLC, Overland Park, Kan., said in an interview. ”We think that it's very important that plans continue to be structured in a way that encourages people to save as much as they can.”
According to the American Society of Pension Professionals & Actuaries, because the various deficit-reduction proposals are required by federal budget accounting law to rely on current cash-flow analyses instead of present-value analysis, the proposals fail to estimate the value of the tax breaks over the accounts' lifetime, which shrink the government's cost by as much as 75%, especially as they grow in popularity.
That “bad budget” math could have a disastrous effect on workplace retirement savings, if tax incentives are reduced or removed, warned Brian H. Graff, executive director and CEO of the Arlington, Va.-based ASPPA.
Public pension plan participants are not immune, either, particularly in states re-evaluating their contributions and putting more pressure on employees to save more themselves. Without the tax incentive, “their ability to save will be cut, too,” said Mr. Graff.
Employer groups like the American Benefits Council are relying on budget negotiators on Capitol Hill to understand the value of workplace retirement savings. The council cites a study released in July by the Employee Benefit Research Institute, which found that the proposed “20/20” cap would not just affect highest-income workers, but lower-paid ones as well.