Originally published in Benefits Law Journal Spring 2012, Volume 25, Number 1, pages 1-4.
If we could help restore our nation’s fiscal health by reducing employer and employee contributions to 401(k) and other defined contribution (DC) plans, the cutback might justify the harm caused by discouraging retirement savings. But every current proposal before Congress to scale back or even eliminate the 401(k) deduction is premised on the federal government’s erroneous calculation of the tax revenue currently lost through such retirement plans. Proper accounting would expose the lunacy that we could somehow balance the budget if workers just saved less money.
Employee retirement plans are ranked each year in the top three on the “Most-Wanted List” of largest tax expenditures, alongside tax breaks for health care and the home mortgage deduction. For 2011, the Congressional Joint Committee on Taxation (JCT) put the amount of lost tax dollars (a “tax expenditure” in government parlance) from all retirement plans at $120 billion, estimating that cost will rise to $174 billion by 2013. The US Government Accountability Office (GAO), using a slightly different set of assumptions, puts the 2011 bill at $134 billion. Over half of this lost revenue comes from employee 401(k) contributions, employer matches and other DC contributions, IRAs, and self-employed Keogh plans. Desperate for revenue, you can see why Presidential commissions, Congress, and many pundits are targeting 401(k) plans to help fix the nation’s financial woes.
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