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.