"I recognize it's a very controversial suggestion, but on the other hand, for decades, ever since I was at the Federal Reserve Bank of Boston, I have been persuaded that it accomplishes very little," Munnell said, referring to tax deferrals.
The authors contend that tax deferrals favor high earners who are more likely to have access to — and participate in — employer-sponsored plans and contribute more than lower-wage earners when they do participate. In fact, 59.2% of current tax expenditures for retirement saving flows to the top quintile of income distribution, the authors state in the report, citing data from the Urban-Brookings Tax Policy Center.
"It's a waste of money," Munnell said.
The authors contend that tax deferrals do little, if anything, to increase retirement savings. Individuals who put money into retirement savings accounts would have done so regardless of the tax deferral, they argue, pointing to a variety of studies.
"The evidence indicates that the increase from treating the savings preferably is very small," Munnell said.
The report also makes the case that tax deferrals haven't done much to increase retirement plan coverage. The percentage of workers age 25 to 65 participating in employer-sponsored retirement plans has remained stubbornly at roughly 50% since 1989, the authors point out.
Since the tax deferrals do not appear to work, the authors propose eliminating or reducing them and putting the money to work to shore up Social Security.
"Redirecting the tax expenditure to Social Security would reallocate existing funds that do not significantly improve retirement income security to a program that indisputably does," the authors write in the report.
In 2020, the tax preference for employer-sponsored retirement plans — both defined contribution and defined benefit plans — and individual retirement accounts reduced federal income taxes by $185 billion to $189 billion, equal to about 0.9% of gross domestic product, the report said, citing U.S. Treasury estimates.
The authors endorse using the money to instead refurbish Social Security, which faces an actuarial deficit of 1.3% of GDP.
Doing so would reduce the Social Security long-term funding gap by at least 70%, the authors estimate.
Munnell notes that co-author Biggs, often an opponent with whom she's sparred over retirement security and other policy issues, interestingly agrees with her on the issue of tax deferrals.
"We come at things very differently, and yet on this one, we really agree," Munnell said.
Munnell is bracing for the anticipated negative reaction to the proposal, saying that in the end you have to stand up "for what you really believe."
"It's too big an issue to keep tiptoeing around and pretending that it's a sensible expenditure," she said of retirement plan tax deferrals.
