Faulty Budget Scoring Could Shortchange 401(k) Plans

As the House Ways and Means Committee prepared on Tuesday for an overhaul of the tax code, the American Society of Pension Professionals and Actuaries (ASPPA) said that the current system could take a bite out of the retirement savings incentives American workers depend on.

In a report released by the ASPPA called ”Retirement Savings and Tax Expenditure Estimates,” Judy Xanthopoulos, a former economist of the JCT, and Mary M. Schmitt, a tax attorney, questioned the method used the Congressional Joint Committee on Taxation (JCT) and the Treasury Department’s Office of Tax Analysis (OTA).

In their report, Xanthopoulos and Schmitt maintain that the current method ignores that money contributed to 401(k) plans (and investment returns) is taxed on the way out. The budget is scored on a cash basis with a 10-year budget window. Because retirement contributions typically are not all distributed within this time frame, the scoring disproportionately reflects the tax cost of the contribution without offsetting the tax revenue that is shared with the Treasury Department upon distribution. The real present value cost of 401(k) contributions is less than half the amount reported by JCT, the report said.

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The analysis exaggerates the real cost of the tax incentives for retirement plans, Xanthopoulos and Shmitt said. With the type of analysis that economists use for long-term projections, they estimate the five-year cost of the retirement savings tax expenditure to be 54% lower than comparable figures from the JCT and the OTA.

“We urge the committee not to dismantle what’s working with our retirement plan system and put the retirement future of American workers in jeopardy,” said Brian H. Graff, ASPPA’s executive director and chief executive. “The amount of perceived revenue that would be raised by cutting retirement savings incentives is a paper fiction. As we try to make sense of our nation’s budget, let’s start by making sure our analysis is based on numbers that make sense.”

The ASPPA’s 2012 research is available here,  and the infographic “Government’s Bad Math Could Hurt 401(k)s” is here.