The Washington outlook for retirement and investment policy in 2013 can be summed up in one word: revenue.
The Jan. 1 short-term fix for the fiscal cliff of expiring tax cuts and looming budget cuts leaves big-ticket items like tax reform and a daunting federal budget deficit on the table. As 2013 gets under way, “you've got a busy 100 days of big-picture stuff,” said Brian H. Graff, CEO and executive director of The American Society of Pension Professionals & Actuaries in Arlington, Va.
Groups representing the retirement industry expect that Congress' attempt at the first major tax code overhaul since 1986 “is going to suck all the air out of the room,” said Kathryn Ricard, senior vice president of retirement policy for the ERISA Industry Committee in Washington. Beyond tax reform, “it's a pretty short list for retirement.”
That means the tax-deferral advantage for retirement savings will get plenty of attention in tax-reform talks, welcome or otherwise. “I don't think retirement is going to be untouched,” said Michael Falcon, managing director and head of retirement, Americas, for J.P. Morgan Asset Management, New York. “People are looking at big pots of money, and retirement deferral is a big pot of money.” It's different in this round of tax talks “because the system is growing up” and the amount of deferred tax revenue has grown with it.
Retirement industry lobbyists have dedicated lots of energy to educating members of Congress and their staffs on the distinction between tax deferrals and outright tax deductions, but realize the budget scoring method simply doesn't factor in taxes paid later.
“At the end of the day, there is a practicality. The math is what the math is,” said Mr. Falcon. President Barack Obama's fiscal 2013 proposed budget estimated that during the next five years alone, retirement tax deductions taken by employers and individuals add up to $429 billion in lost tax revenue.
Like the 1986 tax reform, which cut the deductibility of 401(k) contributions by 70%, many observers think one likely outcome in the current hunt for more federal tax revenue could result in limits on tax deductions of retirement plan contributions for upper-income earners.
“There is no question that there is going to be an examination of fairness,” said Karen Friedman, executive vice president and policy director of the Washington-based Pension Rights Center. “We should make tax subsidies work better” to encourage more retirement savings.
Jamie Kalamarides, senior vice president for institutional investment solutions with Prudential Retirement, Hartford, Conn., agrees. “Everything is under consideration when you reform taxes. However, I also have a high degree of confidence that there is bipartisan support for retirement. Everyone realizes that a dollar saved today is a good thing for the future of America. The question is, how much tax revenue do they want to dedicate to it?”
Another target is carried interest for private partnerships. Changing the level at which it is taxed to the ordinary income rate of 35% from the current 15% capital gains rate could produce $13 billion in tax savings over 10 years. Defending that, said Steve Judge, president and CEO of the Private Equity Growth Capital Council in Washington, “is going to take an awful lot of time and energy” as revenue hunters scrutinize carried interest and other investment-related tax treatments on partnerships and credit financing.
While the Jan. 1 fiscal cliff deal kept carried interest as capital gains, it hiked the tax rate to a Clinton era 20% that, combined with a new 3.8% tax surcharge on net investment income of high-income earners to pay for universal health care, amounts to a 58% tax hike for capital gains, Mr. Judge noted.
If there is any time and energy left, Senate Health, Education, Labor and Pensions Committee chairman Tom Harkin, D-Iowa, hopes to hold hearings on his proposal for a universal private retirement system with professional money management.