(updated with correction)
A proposal to replace the current tax deductions for 401(k) plans and IRAs with a flat tax credit got a chilly reception before the Senate Finance Committee on Thursday as panel members and pension experts defended the plans and the incentives for employers to provide them.
At the center of the testimony today was a proposal offered by William G. Gale, director of the Retirement Security Project at the Brookings Institution, to create a saver’s credit, or matching government contribution, into taxpayers’ retirement savings accounts, eliminating the tax exemption for contributions to employer-based accounts.
Mr. Gale said this would address what he called the “upside-down” tax advantages of current incentives for 401(k) and IRA contributions, which he argued benefits higher-income people who already save more. “It goes most to those who need it least,” Mr. Gale said in testimony.
“I think that a key message was delivered — that an individual’s retirement security is integrally linked to whether or not they are offered a retirement plan by their employer,” Edward Ferrigno, vice president of Washington affairs for the Profit Sharing/401k Council of America, said in a telephone interview following the hearing. “Tax policy should heavily reflect that reality.”
Karen Friedman, executive vice president and policy director for the Pension Rights Center, applauded the “creative idea” for “getting to the heart of the inequities,” saying it would spur retirement savings.
“We’re still skeptical that just giving new incentives to employees will be enough,” Ms. Friedman said in an interview after the hearing.
Along with doubts about how much retirement savings individuals can or will put aside on their own, Judy Miller, chief of actuarial issues and director of retirement policy at the American Society of Pension Professionals & Actuaries, shot down several other “myths” of the saver’s credit idea, beginning with Mr. Gale’s assertion that it is revenue-neutral, while current tax deductions represent lost revenue.
Current deductions “are a deferral, and they are taxed when they’re distributed,” Ms. Miller told the panel. In the absence of any real tax revenue advantages, she argued, “this is not the time for a massive experiment with workers’ retirement savings.”
Ranking committee member Orrin Hatch, R-Utah, agreed. “Trying to help lower-wage workers save for retirement by reducing the 401(k) and IRA contribution limits is like trying to cure a headache with a guillotine,” Mr. Hatch said.