In his second term, President Barack Obama faces immense challenges in reviving the economy, spurring employment and dealing with a massive federal deficit and debt that threatens to veer out of control and lead to a possible further downgrading of the government's once-AAA credit rating.
Dealing with those challenges, most immediately trying to head off the fiscal cliff in January that would trigger automatic tax increases and spending cuts, will mean an extended hunt for revenue that likely will look at unusual sources, possibly including tapping the billions of dollars in the employer-based pension system.
That would be a mistake.
Pension tax deferrals are the second largest tax expenditure of the federal government, causing income tax revenue losses estimated around $105 billion in fiscal year 2011, according to a Government Accountability Office report. Broken down, the report noted the total consists of $62.9 billion for 401(k) defined contribution plans and $42.2 billion for defined benefit plans. That total expands to $134 billion, when it includes forgone federal revenue of $15 billion from Keogh plans and $13.9 billion from individual retirement accounts.
The administration might try to revive separate proposals of the National Commission on Fiscal Responsibility and Reform and the Congressional Budget Office that would tap 401(k) and other defined contribution plans as new sources of federal revenue by reducing the maximum tax-deductible contributions.
At the same time, the administration and Congress might continue to provide pension funding relief to corporate plan sponsors, ostensibly to assist corporate operations in a weak economy, while providing government with a big source of new revenue as companies bolster income instead of using tax deductions for retirement plan contributions.
Tapping retirement funds, whether DC or DB plans, for revenue is a mistake. Defined contribution plans are tax-deferral programs, not ways of tax avoidance. And defined benefit plans need to improve funding, not defer it and thus threaten their sustainability.
President Obama won a sweeping re-election, a victory defying predictions of a close outcome. Now he should defy those who might urge him to look at potential pension revenue sources. This would avoid long-term harm to retiree welfare that raiding pension contributions or reserves would cause.
