While President Barack Obama spoke in only broad strokes in his State of the Union speech Tuesday about his vision for helping the middle class save more for retirement at work, and for rebalancing a tax code that he said favors the wealthy, industry sources questioned the necessity of some proposals for which the White House had already laid the groundwork before the speech.
The White House offered details on proposals for achieving those goals that Mr. Obama will submit to Congress in two weeks as part of his fiscal 2016 budget.
Mr. Obama will reintroduce the idea of a cap on tax-favored accumulation of all private retirement assets, including defined benefit and defined contribution plans. Aimed at providing annual retirement income comparable to the current $205,000 annuity limit for defined benefit plans, after which the savings would not be tax-deferred, the proposal, if enacted, would result in a $3.4 million cap on retirement accounts at current interest rates.
The cap proposal “is misleading,” said Alan Glickstein, senior retirement consultant at Towers Watson. “There are already significant limits (on retirement plan contributions and benefits). It's just going to add more costs to a system that is already overburdened, and not doing anything real. This isn't the kind of policy we need.”
According to modeling done by the Employee Benefit Research Institute, more than one in 10 current 401(k) participants are likely to hit that cap before age 65 and even more will when interest rates begin to rise.
Mr. Obama also took aim at higher-income taxpayers by announcing $320 billion in tax increases that would be used to finance tax credits for more moderate income workers. Part of the tax increases would come from increasing capital gains tax rates to 28% for those earning the highest incomes. He also will propose a seven-basis-point fee on leverage held by financial institutions with assets of $50 billion or more.
“The United States already has among the highest integrated capital gains and dividends rates in the developed world,” said Kenneth Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association, in a statement. “The president's proposal would push us further out of step with our economic competitors and would worsen the existing bias for debt over equity financing. The tax code is not the place for a broad, new, and duplicative financial regulatory regime.”
Also, to spur more workplace retirement savings, Mr. Obama would require employers with 10 or more employees that do not now offer retirement plans to enroll workers, including part-time employees, in automatic individual retirement accounts; workers would have the right to opt out of the plans. Smaller employers offering an auto IRA, or adding an auto feature, would get a tax credit. According to Aon Hewitt, 89% of large employers already offer a defined contribution plan to part-time workers, compared to 72% in 2001.