President Barack Obama will use tonights State of the Union address to revive previously announced proposals intended both to spur greater retirement savings by Americans who need to save more, and to limit retirement plan tax benefits for higher income earners.
The prospect of the re-introduction of some of the proposals prompted criticism from the American Benefits Council and a word of caution from the Employee Benefit Research Institute, but general support from the Insured Retirement Institute.
In a statement issued Monday, ABC President James A. Klein stated that in earlier discussions about the proposed restrictions on retirement savings, benefits experts were astounded that while they and many policymakers have warned about the need for more robust savings Washington is putting forth proposals that will inhibit the savings needed for future retirement security.
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The specific proposal at issue would prohibit contributions to and accruals of additional benefits in tax-preferred retirement plans and IRAs enough to provide an annual income of $210,000 in retirement, according to a White House summary.
Critics principal complaint is that the formula the proposal uses is based on todays historically aberrational low interest rates, resulting in a calculation that the limit could kick in when a 62 year old had salted away about $3.4 million in retirement accounts.
Misleading estimate?
Portraying the Presidents proposal as limiting retirement plan to about $3.4 million is very misleading, Klein said. When interest rates return to historic norms, the effect of that $210,000 retirement income ceiling would be to cap aggregate account balances for a 35-year-old to $300,000, according to ABC estimates.
Politically it is very convenient to target people who have saved $3.4 million, Klein said. But given the probability of rising interest rates and how it would impact younger workers under the proposed cap, the long-term economic security of many workers today would be eroded for the sake of short-term revenue gains.
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By EBRIs calculations, 10 percent of 401(k) participants are likely to be hit by the proposed cap at some point prior to age 65.
Catherine Weatherford, president of the Insured Retirement Institute, says her organization shares a lot of the administrations goals of supporting middle-income Americans and their efforts to effectively prepare for financial wellness in retirement.
She adds that the IRI emphasizes the role that financial professionals can play in helping to guide workers in making the most effective use of their employee sponsored retirement resources, as well.
We are happy the president is focusing on financial security in the SOTU address, she says. "We have a complex tax structure in the U.S. and a complex legal structure, and the outcomes when using a financial professional to help and support American workers with those decisions can make all the difference in security and their retirement. We think its important, and were going to be strong and vocal on this topic going forward because we know this really does make a difference.
Given that the proposal wasnt enacted before the Republican party gained a majority of seats in the U.S. Senate, there is little reason to believe this proposal would be enacted any time soon. Yet this and other tax proposals being unveiled tonight aimed at increasing the tax burden on higher-income Americans will set the stage for debates that will play out during the 2016 presidential campaigns.
Other components of the retirement plan proposals include:
- Automatically enrolling employees into an IRA if they lack access to a 401(k)
- Proving tax incentives for businesses that choose to offer employer plans or switch to auto-enrollment, and
- Roll back current permissible exclusions on retirement plan participation to allow employees who have worked at least 500 hours for an employer per year over at least three years, to make voluntary contributions to the employer plan. Today employers can exclude employees who work less than 1,000 hours, regardless of their tenure with the employer.
