Employers sponsoring tax-qualified retirement savings plans believe proposals to reduce such limits are short-sighted and harmful, especially as traditional pension plans are phased out. Specifically, plan sponsors believe the current limits:
- reward younger savers for tightening consumption now for a more comfortable and stable retirement later;
- allow two-income families to save more if only one spouse has access to a tax-qualified defined contribution plan;
- help workers maximize savings opportunities during good times, when future earnings are unpredictable;
- increase employees' ability to defer more later in life (not to be confused with the catch-up provision); and
- reduce employees' dependence on entitlement programs in retirement.
In an effort to help employees create and maintain a sound retirement savings strategy, an increasing number of employers sponsoring 401(k) or 403(b) plans are designing their contribution strategies (i.e., the employer match) to provide an incentive for employees to save upward of 15% to 20% of their eligible compensation for retirement.
The reality of the current tax paradigm is that it is good for both individual savings and government coffers. While counterintuitive, tax deferrals into 401(k) and 403(b) plans in the current tax year increase tax revenue in future tax years; put another way, tax deferrals reduce short-term revenue, but increase revenue in the year the income is recognized because of the investment growth multiplier.
If federal and state policymakers are confident in their own promises of future economic growth and prosperity, maintaining current deferral limits is the smarter approach for everyone.