We sincerely appreciate Pensions & Investments' reporting on the potential threat new tax policy poses to the U.S. DC system in the Aug. 21 article "Tax reform efforts put retirement plans at risk." Our respective memberships represent plan sponsors and firms that help millions of workers keep their retirement savings on track, and we appreciate P&I giving us the opportunity to provide perspective.
We are writing this letter because the article omitted a critical public policy issue that will significantly impact the tax reform debate.
While this might be an obvious point to many readers, it is important to make it absolutely clear when discussing tax reform that the tax benefit enjoyed by DC savers is not perpetual, but deferred. Workers saving in a 401(k) account enjoy a tax deferral, and the U.S. Treasury ultimately collects tax on what is actually a larger pool of assets when savers retire and begin to withdraw their savings for living expenses. Furthermore, the deferred investment earnings are taxed at ordinary income rates, when many times the gains would have been taxed at a lower capital gains rate.
Other tax deductions, like the home-mortgage deduction or the deduction for state and local taxes, are permanent — there is no deferral and later tax payment. This is important because when the tax deferral on retirement savings is treated the same as these other permanent tax exclusions, the discussion grossly exaggerates the true "cost" of retirement savings. And, this exaggerated cost estimate can lead policymakers to make decisions based less on sound public policy than simply on their budget scoring and (phantom) revenue generation goals, as is the case with the current discussion to move the 401(k) system to an all-Roth model (so-called Rothification).
Clearly, there are many benefits to saving for retirement that support the existing tax deferral preference, including building a society that encourages financial independence, providing a long-term, stable source of capital for our economy and allowing workers to supplement Social Security.
Whenever there is an article about tax policy and the potential impact on the DC system, we at DCIIA and CIEBA encourage all media to also make clear the distinction between the temporary nature of tax deferral of DC plans from the permanent/perpetual nature of other tax deductions. It's critically important that the policy debate is informed by a balanced, and accurate, discussion of the costs and benefits of the retirement savings tax deferral, particularly when the budget scoring process used in Congress simply does not reflect reality.
Our respective memberships encourage workers to take a long-term view in saving and investing for their retirement security. We encourage policymakers and other stakeholders to embrace a similar long-term perspective.
President and CEO, Defined Contribution Institutional
Executive director, Committee on Investment of
Employee Benefit Assets