Despite recent tax reform proposals, experts testified at a House committee hearing Tuesday that cutting incentives for retirement plans would be detrimental to savings.
Recent tax reform proposals include dramatic cuts in maximum contribution limits, a cap on the value of the current year’s exclusion for households making over a certain dollar amount and conversion of the current year’s income exclusion to a credit, according to the American Society of Pension Professionals and Actuaries.
So many changes to the tax code — 4,500 in the last decade, 579 of them in 2010 alone — lead House Ways and Means Committee Chairman Dave Camp (R-Mich.) to question if the “ad hoc development of retirement savings incentives has led to undue complexity and inefficiency that reduce the effectiveness of these incentives,” for 401(k) and 408(b)(3) plans.
Yet, the plans are not too complex and the different tax codes are “not an impediment to employers setting up a plan,” says Judy Miller, director of retirement policy at ASPPA. “The No. 1 reason for [employers] not having a plan is not ‘It’s too complicated,’ it’s ‘I can’t afford it.’… options and flexibility [are] not the enemy.”
Among the ideas five experts presented to the committee at the hearing on tax reform and tax-favored retirement accounts was increasing use of auto-enrollment and better use of technology in disclosures, but most stressed that the tax code should not drastically change for retirement plans, in which 66% of all full-time U.S. workers participate, according to Camp.
Miller says that tax incentives are what keep the plans successful. “Americans depend on their employer-sponsored plans to save for retirement,” she says. “Simply put, tax incentives for retirement savings play an important role in encouraging employers to sponsor and maintain retirement plans and encouraging participants to contribute to such plans.”
Randolph Hardock, a partner in the law firm of Davis & Harman LLP, also argued that the current tax incentive structure is the foundation for a successful retirement savings program, a “retirement system that is working,” he says.
Speaking on behalf of the American Benefits Council, Hardock said that Congress’ most important priority when dealing with retirement plan tax reform is to “do no harm.”
“Policymakers should avoid actions that make it more difficult to accumulate savings and generate sufficient retirement income,” he said in written testimony. “Since the employment-based retirement system is the most effective and significant source of retirement saving, any changes … [should] be approached with extreme caution.”
In the statement he added, “The wisest course in most instances will be not to enact new laws or implement expansive new regulations. Unintended consequences are likely, and we simply cannot afford to gamble with the retirement security of working and retired Americans.”
Ranking Committee Member Rep. Sander Levin (D-Mich.) said that he agrees the system should not change, and “tax reform should approach retirement savings incentives with an eye toward strengthening our current system and expanding participation, not as an opportunity to find revenue.”
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