Threat to tax reform around 401(k) retirement plans prompted the American Benefits Council to appeal to Congress on Thursday to “do no harm.”
“The employer-sponsored retirement system helps millions of American workers at all income levels accumulate retirement savings,” American Benefits Council President James A. Klein said in a statement. “As Congress considers broad-based tax reform, we urge lawmakers to ‘do no harm’ and avoid actions that would discourage participation in employer plans.”
The Council’s statement describes the tax incentives that make employer-sponsored plans so effective — both as a driver of economic growth as well as a source of personal financial security.
“Some have suggested fundamental changes to the tax treatment of 401(k)s and other defined contribution plans,” Klein said. “Such proposals are deeply flawed and should be rejected.”
The broad coverage and participation in employer-sponsored defined contribution plans result from the existing tax incentives that motivate employee saving and that encourage employers to maintain and contribute to retirement plans, and under the tax reform proposal, 401(k) contributions would no longer be pretax, ABC asserts.
“Economic studies have demonstrated that the so-called ‘20/20’ proposal advanced by the Simpson-Bowles deficit reduction panel, under which the cap on annual employer and employee retirement plan contributions would be lowered to the lesser of 20% of the employee’s compensation or $20,000, would depress retirement savings for all income levels,” Klein said.
The trillions of dollars in retirement plan assets, representing ownership of a significant share of the nation’s pool of stocks and bonds, provide a source of investment capital for American businesses, helping companies grow and add jobs to their payrolls and raise employee wages, the Council notes.
“Another proposal outlined at the hearing today would replace all tax exclusions and deductions for retirement savings with a flat 18% tax credit. This would cause a steep decline in retirement plan sponsorship and dramatically reduce retirement savings,” said Klein.
Under standard budgetary methodology, the taxes an employee will pay when he or she retires and starts taking taxable plan distributions generally occur outside the budget window. Proposals that reduce retirement savings today will mean the government actually collects less revenue in years outside the budget window because retirees will have less taxable retirement income. As a result, any overall budgetary savings that might result would be considerably smaller than the short-term revenue estimates might suggest.
“In the context of deficit reduction and tax reform, many observers have raised the challenges America will face in the future if we do not make the correct choices now. Employer-sponsored retirement plans help provide and preserve personal financial security for the future. We urge the Senate Finance Committee and all of Congress not to make impulsive or short-sighted changes that would undermine the current system,” Klein said.
