ERIC Urges Caution on Tax Treatment of Retirement Savings

In a letter submitted to the House Ways and Means Committee’s Tax Reform Working Group on Pensions and Retirement, Kathryn Ricard, ERIC’s Senior Vice President for Retirement Policy, wrote: “Changing the current tax treatment of employer-sponsored plans would jeopardize the retirement security of tens of millions of workers, impact the role of retirement assets in the capital markets, and create challenges for future generations of retirees in maintaining their quality of life.”    

ERIC’s letter points out that the current tax treatment of retirement savings is one of the central foundations upon which the system has been successfully built, and the effects of such a change for individuals, employers and the system as a whole are simply too harmful and must be avoided.  

Ricard explains that employers voluntarily establish retirement plans for a variety of reasons, such as competing for and keeping quality workers, and ensuring workers can retire from their workplace with adequate retirement savings.  The letter notes that the voluntary nature of the private sector retirement system is critical to its success, and because employers come in all shapes and sizes, a “one-size-fits-all” approach to rules and regulations often will not address the challenges of companies who want to offer retirement benefits to their workers.  

ERIC’s letter further points out that, when measuring the cost of the tax deferrals into retirement plans, such as 401(k) plans, the calculations performed by the Joint Committee on Taxation (JCT) and the Treasury Department do not consider that there is only a deferral of taxation.  Because workers generally withdraw money from these plans only in retirement, the majority of the taxes paid show up outside the 10-year time frame used by the JCT and Treasury Department.  “The approach used by the JCT and Treasury Department significantly exaggerates the actual cost to the government with respect to the tax incentives for retirement plans and ignores the real long term value of the plans to the country and working Americans,” Ricard said.   

Moreover, ERIC notes that the elective deferral limit works well and should be maintained, contending that workers need flexibility to be able to save more when they are able and less when under financial constraints.  For example, the letter explains that an individual may be able to save more when they are younger or once their children become adults, but have less money to contribute when paying for their children’s college education or caring for their elderly parents. It is critical that Congress recognize the value of the current system that reflects typical lifetime savings habits and maintain the elective deferral limit, the letter urged.    

Finally, ERIC points out that President Obama’s proposal to limit the amount American workers could save for retirement would adversely impact overall retirement savings, as changes to the rules and regulations associated with saving for retirement often have unintended consequences, including a “chilling effect” on savings even by individuals who are unaffected by the rule changes.