Tuesday, November 30, 2010

Think Tank Recommends Decreases in Tax-Favored Retirement Contributions

The Bipartisan Policy Center (supported by the Economic Policy Institute) recently unveiled a proposal, that among other things, would decrease the total amount that could be contributed to tax-favored, or qualified, retirement plans to $20,000 or 20% of pay, whichever is smaller. (You can read the full report here: http://www.bipartisanpolicy.org/sites/default/files/FINAL%20DRTF%20REPORT%2011.16.10.pdf . The section referenced above can be found on page 39 of the 140 page document.)

This would serve to make many Americans even less prepared for retirement than they are currently. Companies with defined benefit plans and defined contribution plans (yes, there still are a few) could be limited in their contributions. Even participants in 401(k) plans would often see their deferrals reduced.

This is lunacy (assuming that the income tax is continued). In a day where 'leakage' (losses in 401(k) accumulation due to loans, hardship withdrawals and discontinuity in employment among other things) is commonplace, workers who would like to retire someday need to be able to catch up during good times. The Congress and President saw this in 2001 with the passage of EGTRRA in 2001 which allowed for "catch-up" contributions for those at least age 50.

It seems to this writer that under that structure, the two groups of people who will likely be able to retire are those with ultra-high income and those with very low income. The first do not have costs that tend to obliterate their incomes (unless they choose to live that high off the hog). The latter will live off of Social Security and Medicare or Medicaid and have a lifestyle similar to what they had when they were working (or not). For the rest, costs like education for their children, energy, housing, and taxes will diminish their abilities to save for their own retirement. Being deemed redundant in the workplace may result in layoffs that further cut into any savings they may have.

This proposal is akin to classism -- a stratification of classes where in this case, the true upper class are fine, the lower class may be better off in retirement and the middle class will work forever (if they can) in order to not become the lower class.

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