Smart TaxesSmart Taxes

Washington targets retirement tax breaks

The debate centers on whether the incentives only really benefit the wealthy, and whether the government should use tax breaks to encourage Americans to save for retirement.

By MSN Money Partner Apr 7, 2011 1:58PM

This post comes from Joe Mont at partner site TheStreet. on MSN MoneyAmid a backdrop of deficit concerns, debate over the future of Social Security and Medicare and a looming government shutdown, tax deferrals for retirement plans could be on the chopping block.


Talk in Washington, spearheaded by Congressional leaders including Speaker of the House John Boehner, R-Ohio, and Senate Budget Committee Chairman Kent Conrad, D-N.D., is that tax reform needs to tackle so-called tax expenditures. These incentives, which account for roughly $1 trillion in bypassed budget revenue each year, have been described by Conrad as a "back-door way of spending federal money."


Among these tax expenditures are exclusions for such items as mortgage interest deductions and employer contributions for health care. Post continues after video.

The deferral of taxes on contributions to IRAs, 401k plans, variable annuities and other retirement savings vehicles are among the incentives that could be reduced or eliminated. Typically, contributions to these accounts grow tax-free until they are withdrawn at retirement, then are taxed at what is usually a lower rate post-retirement.


Retirement-tied tax incentives will cost the government about $142 billion in forgone tax revenue this year and about $788 billion over the next five years. The value of the incentives is challenged by critics who claim 80% of the benefits are claimed by the top 20% of income earners.


Testifying before the U.S. Senate Budget Committee on March 9, Robert Greenstein, president of nonpartisan research organization the Center on Budget and Policy Priorities, spoke against the current system of tax expenditures and described the intended incentive for retirement savings as regressive.


"The costs of tax expenditures are large," he said. "In 2010 ... tax expenditures -- both individual and corporate -- amounted to $1.05 trillion. This greatly exceeded the cost of Medicare and Medicaid combined ($719 billion), Social Security ($701 billion), and non-security discretionary programs, which stood at $589 billion, a little over half of the cost of tax expenditures."


"As is the case with the mortgage interest deduction, high-income individuals receive the largest immediate benefit of the exclusion, even though they are the people most likely to save anyway in the absence of a government tax subsidy," he said.


The rich can often "reshuffle" assets to take advantage of tax breaks, rather than by increasing their savings, he said, noting that the Congressional Research Service has reported that "because higher earners would save much of their income even without tax incentives to do so, a substantial share of the revenue lost through the deduction for contributions to retirement plans does not result in a net increase in national saving."


"While tax cuts will always curry more favor with voters than new spending programs, Washington needs to call a truce to using the tax code for social or economic goals," Seth Hodge, president of The Tax Foundation said at that same hearing. "The consequence of trying to micromanage the economy as well as individual citizens' behavior through the tax code is a narrow tax base and unnecessarily high tax rates. These high rates are endangering America's global competitiveness and undermining the nation's long-term economic growth."


Putnam Investments CEO Bob Reynolds doesn't see it that way. During a speech at the Retirement Income Industry Association's 2011 Spring Conference in Chicago, he warned that going after these tax incentives would reduce the motivation to save at a time many Americans already face a shortfall in their retirement savings and lack confidence in their ability to enjoy a secure retirement.


"It would be a terrible policy mistake to curb federal profligacy by undermining incentives for private saving," he said. "America needs to move to solvency not just for the government, but at the household level too."


"With baby boomers now in or approaching retirement, the stakes are much higher than they were 25 years ago," he added. "We have to get budget deficits under control, but we have to do it the right way -- by encouraging savings that fuels investment, business formation and job creation. In the long run, the only tolerable way to overcome our deficit challenge is through economic growth, led by the private sector and fueled by Americans' own savings. Anything that undermines personal and workspace savings also undermines those goals. Congress should dismiss such ideas out of hand."


The Employee Benefit Research Institute, citing data from this year's Retirement Confidence Survey, is also against changes to the status quo and challenges the assertion that mainly the well-off benefit.


Jack VanDerhei, EBRI's research director, says these proposals would have "unintended consequences "


"Instead of reducing the contribution levels of those with larger taxable incomes, and hence higher marginal tax rates, the RCS results indicate that workers with low levels of household income would be most likely to cut their contribution -- in some cases completely," he says.
The survey found that more than three-quarters of full-time workers with household income of $15,000 to $25,000 say that having the ability to deduct their contributions to retirement savings plans is "very important." More than half of full-time workers saving for retirement said they would reduce the amount they save if they were no longer able to deduct retirement savings plan contributions from taxable income.


Among full-time workers who said they have less than $1,000 saved for retirement, 71.3 % indicated they would reduce the amount they save. Only 22% of full-time workers saving for retirement with household incomes of $100,000 or more say they would cut back.


States are also looking to boost their diminishing budgets by eyeing retirement-related tax changes. Michigan legislators, for example, are debating a proposal to levy a 4.25% income tax on pensions and 401(k) and IRA income.


Read more from MSN Money:


Apr 7, 2011 7:55PM

This is completely unacceptable. My husband and I are a young couple trying to plan for our future. Our generation no longer has access to pensions. Social security, if it still exists when we retire, will be of no value to us because benefits are phased out according to income.  That is, even though we pay the full FICA tax all year (our income is not high enough to progress out of it), we get proportionally less than low income workers. We are willing to let this go because we are able to save more of our own money to make up the difference. But now the government wants to take that from us too. Compounding interest is how wealth is created over the long term. (And when I say "wealth," I mean enough money to provide half of our pre-retirement income during retirement itself. I'm talking about basic subsistence, not sailing around the world on a yacht.) If our returns are constantly hampered by taxes every time we earn dividends or rebalance our funds, we will be screwed. Especially since poor fiscal responsibility by the government and some corporations is going to result in low stock and bond returns for our generation anyway. No pensions, worthless social security payment amounts, and now our private savings raided. No one paid for our college educations or gave us any special favors or advantages in life. Our parents were blue collar and we pulled ourselves up on our own. We have done everything by ourselves and are perfectly happy to continue doing so. But the government had better not cripple our ability to take care of ourselves by stealing our retirement savings on top of everything else. Unbelievable.


(And MSN needs to move this to their main page. I can't believe something this huge is only on the Money page.)

Apr 8, 2011 12:20AM
So... pensions and Social Security were not considered adequate to fund one's retirement... 401k comes along as "the additional leg" needed to balance the stool of retirement between pensions (if you even had one) and Social Security, toted aid people saving their own money to pay for actual retirement costs.  Pensions are done away with by corporations due to the far cheaper "sponsored 401k" option.  Social Security funds are raided by the government and paid out for various other purposes, which puts them at around 75% of promised benefits within 30 years if it exists at all.  People are told they need to save as much as they can on their own in order to be able to retire at all, let alone by 70ish years of age...

Now the government, who has been completely irresponsible with our money and the economy, wants to pre-tax the tax deferred retirement savings program...  which makes it... what?  A traditional IRA with tax-benefits already phased out?

So there was no point for any of you responsible people out there making sacrifices and doing without over the years in order to save and be able to retire someday, the government now intends to rob you of the future you've been sacrificing for in order to cover their poor fiscal behavior.  The concept of bailouts at the expense of taxpayers and responsible savers has been overplayed.

At best this would only be a short-term influx of tax revenue, as the lack of benefit will kill participation in 401k programs.  That means the stock market will no longer be getting that automated infusion of cash from 401k participants paychecks - enter lower market performance.  Those who participated in 401k for their sole investment strategy due to ease may not find their own brokerage in order to regularly invest for retirement every payday.  Now we have an aging populace with no pensions, reduced social security, ever-increasing medical costs, and little to no personal retirement savings.  Great job, government, how will you spin the new taxes for social programs to deal with that?

We wouldn't dare want to tax corporations or reduce tax cuts for the wealthy, but let's go ahead and rob the retirement funds of those who are willing to put off having today in order to be able to get by during the sunset of their lives.  Those responsible people are making everyone else look bad.

"No, you can't take a two-minute break to use your oxygen tank Lester, stop panting, we need you out there sweeping the lobby -- and no you can't take your walker either.  I have serious concerns about your dedication to this job.  Do you think you're the only 73 year old who applied for this position?"

-- and taking away the mortgage interest deduction?  Great idea, I'm sure the housing market will magically recover and show positive growth with no fiscal benefit to loans for home ownership.  Where do they come up with this?  Let's see some forethought about what these changes mean not just to the bottom line today, but what it means for our nation and our citizens 10, 20, and 30 years down the line.
Apr 7, 2011 8:45PM

Dear Congress,


Go #$%^ yourselves.




Joe Taxpayer

Apr 8, 2011 12:37AM

Cool, so the Government want's a early slice of my wife's meager 100K she has in her IRA. She's retired now and keeping her paws off of it. She must be one of them rich folks we hear so much about socking away all those $$$'s . You know like the $10 an hour she earned as a caregiver. Tried to do the right thing, you know IRA, savings & looking forward to Social Security. No pension from 43 years busting her butt but tha IRA she scraped & saved her nickles and dimes for is looking mighty fine to them now. Going to balance the budget!!


Hey the deal was she could defer taxes until she started to draw on least leave her a little so she can be sucked dry by the nursing home industry.


In regards to 401K or IRA tax breaks.  They allow us not to pay taxes on our retirement.


How could something the Gov't doesn't collect in the first place be considered Gov't money that they count towards the deficit?   


It is like saying every single penny the American people make is actually owned by the Gov't and the Feds are allowing us to keep some of it.


 Ain't so?

Apr 8, 2011 12:01AM
Instead of reducing the amount of money spent on pork barrel projects our government wants to rake in more money to maintain it's lavish lifestyle of entitlements.  When is the last time a politician saw his pension reduced or eliminated ?  When is the last time a politician was forced to take a pay cut ?  When is the last time a politician saw a reduction in his/her benefits package ?  The answer is never because politicians vote on their own wages and benefits at our expense.  

Government will never get smaller or spend less or spend wiser.  Our only hope is to hide as much money as possible overseas and retire outside of the states.  It's government ideas such as eliminating all tax breaks that forces people to rely on the government even more.  If people cannot save for retirement then they will be forced to rely on the government when they stop working.  We are turning into a socialist nation.  The government will take all and dole out what 'it' decides you need to survive.

Apr 8, 2011 10:57AM

 As I had feared all along, the trillions tucked away in retirement accounts is just too big a temptation for taxation. With the "stroke of a pen" all those IRA"s, 401K's and "deferred comp" can be made taxable by Congress, even though millions are counting on these savings for a "secure" retirement. IMHO some form of taxation for retirement accounts will pass AND Social Security benefits will be reduced as well as reduced Medicare. The reason will be ....hey "we're broke". I guess cutting the budget is not fashionable.

 Just a side note,  I find it disturbing that in these troubled economic times that the US found it necessary to deploy over 100 missiles into Libya though no war was declared. AND these missiles cost ove $1M....EACH. That's $100M in less than a week spent on an undeclared support rebels that have factions within that are sworn to destroy Israel and the US....Maybe it's just me BUT I find this troubling....

Apr 7, 2011 6:50PM

Consider that it was Congress that did NOT adjust the maximum deductible IRA contribution to match inflation for a very long time.  They created the people at the lower end in a bind by not raising this minimum.  And time is not on the side of someone 50+ once the rule is changed. 


Congress knows that 2.7 trillion dollars of spending on Social Security and Medicare far exceed the actual federal budget of 1.1 trillion dollars.  And the deficit is over 1 trillion dollars.  So they figure let's look for bait among the voters who do not have the political will to vote them out of office.  Aha!  It is the people who try to be financially responsible/accountable.  Something a member of Congress does not know how to do!!!


In my opinion this article points out how complicated and screwed up the tax code has gotten. However, for those who take the time to read and get an understanding of the code there is an opportunity to save money when filing their tax. I estimate that I spend an average of 80 - 90 hours per year studying various tax laws and tax planning. Tax planning involves a few hours per month throught out the year between January 1 and December 31. About the only thing one can do to lower their tax bill after December 31 is purchase an IRA. With a family AGI (adjusted gross income) of just barely into the 6 digests, I figure I was able to cut my tax bill by $3,800. And in my opinion that was a good return on the hours invested (about $40 per hour) and it is all tax free income. Everything I did was legal. What is wrong with driving at 65 MPH, in good weather conditions, when the legal speed limit is 65 MPH?



Apr 7, 2011 8:53PM
Tax breaks on retirement savings may or may not give preference to the wealthy.  However, their are a lot of other tax breaks for the wealthy that allow them game the system and pay less tax than they should.  If Congress wants to go after some money, they should include elimination of all the quirks in the tax code that allow this.  The wealthy hire CPA's and attorneys to significantly reduce and even eliminate payment of taxes.  This needs to stop.  Warren Buffett, one of the world's richest men, has admitted that his tax rate is far lower than the rate paid by his secretary.  That is just flat pathetic. 
Apr 8, 2011 6:04PM
Hear me NOW people! Read the article and understand it! The government knows something, a lot of things, that they will never tell us, (The public). And here is some of it, Starting in 2016, some people will start taking $ out of 401ks for retirement, and that will be a BIG problems for the overall stock market as the investment$ will decrease. Now they want to TAX our $ both IN and OUT. They get paid 3xs and we pay out 3xs. Be prepared to defend yourselves and your hard earned money. Its just as I see it.     
Apr 8, 2011 12:16PM
Why isn't possible to means test the deductibility of IRAs and 401Ks, if the concern is that they benefit primarily the very wealthy, i.e., phase out the deduction as income increases, thus still providing incentive to the lower and middle income people to save, especially in these days of that nearly extinct animal, the pension?
Apr 8, 2011 11:39AM
Since our Government doesn't seem to be working for us taxpayers, why in the world do we continue to work for them and pay taxes???  Maybe an all out boycotting of paying taxes would send a message???
Apr 8, 2011 1:30PM
eliminate all deductions, iras, mtg interest etc.  exempt income up to the poverty level.  above that reduce all tax rates to one flat rate.    1 pg tax return, instead of the annual insanity.    everyone pays the same % taxes over poverty level.  simple tax, fair tax, flat tax.
Apr 11, 2011 6:49PM

And another "Pledge"


The following initiatives will be taken up immediately upon my appointment:

I will support an immediate reduction in our federal government payrolls for non-defense related work of 30% across the board. This reduction will only include new hire positions.

I pledge to eliminate all “early outs” for government employees and recognize that the need for early outs due to the lower cost of new hires would be called a lay-off or fired in the private sector for senior employees unable to justify their value.

We will eliminate all retirement plans for government employees that provide a retirement before age 67 with the exception of those positions classified as “Hazardous”, starting with all current employees less than age 40 at the time of this new legislation. This is equal in fairness to the US Congress’s actions taken towards keeping our social security cost down and establishing 67 as the target age for social security benefits. (One of the only current government funds that is not legally bankrupt) A complete review of all government positions, with the exception of the military, currently labeled as “Hazardous” will be conducted with no less than 50% of those current positions reclassified as nonhazardous.

I recognize that early outs and some current federal retirement programs have resulted in an unsustainable accumulation of wealth and future debt to the taxpayer for jobs which would hold much less value in the private sector. Individuals with guaranteed retirement pay greater than $60,000 per year and under the age of 60 have been provided with an equivalent of an annuity which would require the private sector taxpayer to achieve a millionaires’ savings to achieve the equivalent financial benefit. This stops now. Foreign competitors of the private sector do not have these same cost burdens and the US can no longer afford to borrow from foreign countries to pay our government employees to rest at home in their 50’s simply because they no longer represent a value at their pay grade.


I pledge that this focus will include our US congressional pay and retirement plans. I will not allow our elected officials to award themselves with retirement pensions at an age earlier than social security recipients. Our current congress has attacked CEO’s that receive incentive bonuses while achieving poor performance. It is time to tie congressional pay to performance and I pledge to support such performance initiatives focused on a reduction in our Federal Debt and US economic indicators.

I pledge to protect the Social Security benefits for future generations and to provide participants over 40 years of age the choice to invest 50% of their annual contributions into alternative funds.


Apr 11, 2011 6:38PM

You cannot legislate government employees into financial freedom by legislating the Social Security Payers out their retirement.  What one person receives without working an entire career, another person must give up at retirement.  

The government cannot give to themselves 20-25 year retirements that the government does not first take from the Social Security taxpayers who actually generate the revenue.  When half of the people get the idea that they do not have to work past 50 to 55  because the other half is going to take care of them, and when that other half gets the idea that it does no good to pay in because somebody else is going to get what they paid for, that my dear friend, is about the end of any nation.

If you create wealth by steeling it and cover it up through legislation…its still theft.


In the next 12 to 24 months the post office will announce another of many rounds of "early outs" because its trying to cut cost since it lost billions last year. In the private sector it would be called a lay off or fired. Typical of the government...the post master general will move thousands off his books and hand them over a retirement account that congress will fund while cutting our little ole social security "pension" that we aren't eligible for till we turn 67. (because we live longer) Meanwhile the post office general will announce his "cuts". There are thousands of federal workers that will retire this year because they work in "hazardous jobs". Ever compare the accident and death rate statistics of these hazardous jobs to the private sector? They aren't hazardous folks. Air traffic controllers average pay is $137,000 and they cant work past 55. How big an annuity has Congress given them at age 55 to live on till they make it to 85. Think about that.

The Republican party fueled by the tea party will cut social security and medicaid in the next coming months. Who is that focused on?, why its the private sector, not the government.  The biggest Ponzi scheme of all time. The Tea Party better wake up as to who is actually going to get taken.

Apr 8, 2011 4:15PM


It is easy to propose things, if you don't know the costs or the impact.

What may seem fair, may not be fair.

There are not many easy solutions to something as complex as the US economy,

Maybe a little research is needed before making far reaching proposals.

Apr 12, 2011 5:51PM
It pretty much makes me sick. all these politicians that get in there can't take the time to figure out  how to balance a budget. what they are good at is figuring out how to get in each one of our pockets to take hard earned money that we all work for, and line there own pockets and redistribute it to someone who never worked a day in there life. Just how long are we going to let this happen? I think it's about time for the lid to blow off this timebomb. It's about  time for a couple million people to show up in washington with guns and let them know the games are over.
Apr 28, 2011 10:14AM

End subsidies to get closer to a real free market, put term limits in place for all elected officials to end career politicians, and provide a path for every citizen to receive true financial education.


There's no reason for the government, and by extension the taxpayers, to give industries tax breaks or low interest loans in order to protect jobs if we truly have a free market economy.  Yes, the value of the dollar will adjust to the market but since it's only worth $0.05 of real money (gold) right now, we certainly don't want to get deeper in debt.  The government, both Democrat and Republican, has repeatedly shown that they can't even balance a checkbook and yet there are no limits to stop them.


The presidency has term limits, why doesn't every other elected position?  Congress and the Senate voting for their own pay raises and special health care benefits that the rest of the public doesn't have access to is unacceptable if we have to pay for it.  We'd likely save a trillion dollars or more by ending the Senate and Congressional benefit package gravy train.  Serve your term and GET OUT!


And finally, if every citizen knew how money and debt really worked their elected officials would have a much harder time using smoke and mirrors to hide all of this.  Your elected officials only want to be your friend as long as you keep them in office and pay enough taxes for them to live beyond all of our means.  They'll promise you anything except financial education and an honest look at the real accounting numbers to keep this train running their way.

Apr 8, 2011 2:32PM


 What would that tax rate be?

I have heard about flat tax for many years, but have not seen many studies what that rate would be.

When Forbes was running for president he wanted a 10% flat tax, which would have required draconian cuts in federal spending. If I am not mistaken the rate would need to be around 25% to be revenue neutral. So, the middle class and people below the middle class would see their taxes rise substantially, and therefore their spending to be slashed at least the same amount. Remember the 'Federal Luxury Tax' of 1991?  This tax cost about 25,000 people in the boating industry their jobs. Now consider how many clerks, stores, restaurants, waiters and waitresses, etc. would be out of work. How many business would close? That would hit mid-management with more jobs lost. The ripple effects would be a vast loss of jobs.


I do agree that the tax forms are out of control.

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