Budget Scoring Methods Could Lead to More Complicated Roth Policies

The congressional budget scoring process incentivizes policymakers to add Roth, or savings of after-tax earnings, provisions to retirement related legislation, experts say. While this may positively affect the federal budget in the short term, it can make retirement policies more complicated and difficult to administer.

The ten-year budget window that is used to “score” the effect a bill will have on federal revenues and expenditures considers traditional contributions to a defined contribution plan as a revenue loss, because of the upfront tax-deferral that is captured in the ten-year window. Roth contributions on the other hand, are considered a revenue raiser in the ten-year window, because Roth contributions are made by individuals on a post-tax basis, even though those contributions (along with any earnings on them) will result in a tax break upon withdrawal in retirement.

Roth contributions are named for the late Senator William Roth, R-Delaware, who first proposed the idea of after-tax retirement plan contributions, and tax-free withdrawals, in 1989.

Kendra Isaacson, a principal at Mindset and a former staffer with the Senate Committee on Health, Education, Labor and Pensions, explains it this way: “the way Roth is scored is almost a budget gimmick.” She notes that a provision that is technically a tax break is counted as a revenue raiser and, as a result “we end up with things like the Roth catch-up contribution because it raises [federal funding] in the short-term.”

The Roth catch-up provision, found in the SECURE 2.0 Act of 2022, requires catch-up contributions made by participants earning $145,000 or more to do so on a Roth basis. It is perhaps the most infamously complicated provision in the law from an administrative perspective and by all accounts only exists to offset revenue losses found elsewhere in the bill.

According to a Joint Committee on Taxation report from March 2022, the Roth catch-up provision is actually the largest revenue raiser in the law, and would raise an estimated $22.36 billion from fiscal year 2022 through fiscal 2031. The second largest revenue provision is the optional treatment of matching contributions as Roth, which would raise an estimated $12.34 billion over the same time period.

Isaacson warns that Roth treatment can potentially be “a bigger loser [in federal revenues] in the long-term,” and cites young people saving in Roth accounts and withdrawing decades later when the majority of the balance, resulting from asset appreciation, is likely to have never been taxed at all. “We are not accounting for that,” she says.

Mark Iwry, a non-resident senior fellow at the Brookings Institution and former senior adviser to the Secretary of the Treasury, agrees that the budget scoring process creates perverse incentives to insert Roth provisions into legislation. He says that traditional retirement plan contributions “should be scored as a deferral and not a pure loss of revenue.” However, that is not how the scoring process works currently, he notes.

The ten-year window for budget scoring is used because it can become very difficult to estimate the effect a tax policy change will have on the budget farther off into the future, so a relatively shorter time frame is used, Iwry explains.

In the absence of a method that accounts for DC plan contributions in a more nuanced way, legislators will often be tempted with Rothification provisions to “pay for” retirement bills.

In 2025, many key provisions of the 2017 Tax Cuts and Jobs Act expire, meaning that tax provisions are likely to receive more attention from Congress going forward. Further changes to retirement law from a technical corrections bill on SECURE 2.0 or even a SECURE 3.0 would also attract further attention to retirement and tax law.

In all these debates, there will be pressure to find easy “revenue raisers” to “offset” other provisions, and this could include more Rothification.