Tuesday, July 16, 2013

Senate Finance Committee Mulls Retirement Changes

In late May, the Senate Finance Committee published its seventh in a series of papers related to potential tax reform. As a 20-pager, it's far too dense for me to cover all the topics in one blog post. So, I'm going to use my editorial license to write about it in pieces. This first piece is on retirement issues.

In the words of the paper, this piece represents a non-exhaustive list of suggestions presented by witnesses at the Committee's hearings on the topic. Given the girth of this piece, those witnesses who suggested options that were left out must feel rather dismayed.

So, given that I have linked you to the Finance Committee piece and that its paper has links and official gobbledygook (that's English for political-speak), why should you read my post instead of the paper? Here are some good reasons for you:

  • This will be shorter
  • My blog is presumably more entertaining than things written by Congress and Congressional staffers
  • Reading my blog will give you a pithy analysis
  • When there is something that I don't agree with, I will tell you so
The paper points out that there are three means of retirement savings for individuals (Congress never mentions MegaMillions or PowerBall
  • Social Security
  • Qualified (employer-sponsored plans)
  • Other saving including IRAs, annuities [and the lottery?]
The paper also points out the qualified retirement plans are one of the largest single tax expenditures. Here I digress. It is true that qualified retirement plans are among the largest federal tax expenditures. Even with them, however, the vast majority of workers, in my opinion, will not be close to having enough money to retire when they turn 65. So, this tells me that the current system is failing.
  • Workers can't retire
  • The qualified retirement system adds considerably to the federal debt and deficit
So what are the proposals? I am going to number them the same way (except that Blogger does not let me use letters as subsections) that the paper does.
  1. Limit or eliminate tax preferences for retirement saving. In my opinion, this will have the effect of companies reducing their commitments to qualified plans leaving workers with an even bigger shortfall.
    1. Reduce or repeal tax expenditures for retirement savings and replace with automatic enrollment or expanded Social Security benefits. This seems to me to be an effort to allow the lower-paid workers to retire from contributions required of higher-paid workers. If you think that is the correct approach, you have a winner. If not, then you don't
    2. Reduce 401(k) limits (see Code Section 402(g)) from $17,500 to $14,850. Hmm. This is a reduction of slightly more than 15%. Why not either reduce by a fixed percentage or reduce to a nice number? For those who are unfamiliar, my personal dictionary says that nice numbers include those which are particularly round and or memorable. $14,850 is neither. And, this proposal would also make it less likely that as many peope are able to retire as under the current broken system.
    3. Cap the value of deductions and exclusions for DC plans to 28 cents per dollar contributed. If I understand this correctly, this would make 401(k) deferrals by higher earners not fully deductible on their federal tax returns.
    4. Disallow deductions for contributions to qualified plans once the total value for an individual is at the 415(b) (maximum benefit) limit. I didn't like this administration proposal when I first wrote about it and I still don't like it. It would be beyond impossible to administer.
    5. Eliminate catch-up contributions. Well, I guess it would reduce a tax expenditure, but the public policy rationale for this is devoid of reason.
    6. Require inherited IRAs to be distributed within 5 years. Ultimately, what this would do is limit the amount of tax-deferred build-up. It will accelerate the payment of taxes and it looks to me to be something intended to play a game with CBO scoring..
    7. Repeal the dividend deduction for ESOPs.
    8. Repeal non-deductible IRAs. Essentially, the purpose of this is to limit tax-favored build-up.
  2. Replace deductions, exclusions and credits for retirement savings with a single refundable tax credit. For the higher earners, this would appear to diminish the value of currently tax-favored retirement savings. For the lowest earners who are somehow able to save, it would be another way to refund them more in taxes than they actually pay into the system.
  3. Increase Savings Incentives. 
    1. Expand the Saver's Credit and make it refundable. The Saver's Credit is a tax credit (currently not refundable) that gives an additional tax credit to low earners who participate usually in 401(k) plans. Making it refundable might allow more low earners to retire someday, but will have a deleterious effect on the middle class as ultimately, this is a redistribution of income. When the lowest earners get a break, someone has to pay for it.
    2. Expand the credit for small employer pension plan startup costs from $500 to $1000. The intent of this is to make the cost of starting a small business qualified plan less prohibitive.
    3. Repeal nondiscrimination rules, contribution limits and restrictions on distributions. This is linked to a flat tax proposal.
  4.  Attempt to increase effect of tax expenditures for retirement savings on retirement security. Talk about pie in the sky and wishful thinking, this is a bunch of untested proposals which in my opinion will not work.
    1. Increase automatic retirement savings vehicles. Don't we already have one of those? It's called Social Security and since it has historically not been funded responsibly, it needs constant changes to have a chance of remaining solvent.
      1. Provide a credit for autoenrollment rather than a fee for failing to autoenroll.
      2. Require employers to make contribution for low earners. Wouldn't this much like the Affordable Care Act cause employers to hire fewer employees?
      3. Require IRAs to provide lifetime income benefit.
      4. Revise the auto-enrollment safe harbor to encourage more savings. This would increase the minimum and require auto-escalation.
    2. Increase the use of retirement savings for annuities or long-term care insurance.
      1. Provide incentives to use a portion of a qualified plan account to purchase annuities or long-term care insurance.
      2. Make life annuities the default distribution option from DC plans. In my opinion, most people will opt out and take lump sums.
    3. Require DC plans for long-term part-timers. Between the requirements proposed for low-paid workers and those for part-timers, companies will have a greater incentive to ship jobs overseas.
    4. Require Lifetime Income Disclosures.
  5. Simplify the plan start-up process.
    1. Combine all current employer-provided arrangements into one plan with one set of administrative rules. Where do I start? This would be a disaster. We have multiple industries, multiple geographies, multiple demographics. This is a horrible idea.
    2. Reduce the number of required notices and make it easier to for a company to distribute them electronically. Great idea.
  6. Create multiple-employer plans for unrelated employers.
  7. Reduce leakage.
    1. Prohibit complete DC withdrawal before retirement age.
    2. SEAL Act.
  8. Allow flexibility in distributions from qualified retirement plans.
    1. Withdraw money penalty-free to make mortgage payments. Doesn't this make it less likely that workers will be able to retire?
    2. Make SIMPLE plans more like 401(k) plans. Employers can always have 401(k)s instead of SIMPLE plans.
    3. Eliminate the minimum distribution rules for account balances under $100,000.
    4. Allow penalty-free withdrawals up to $10,000 for adoption expenses.
    5. Adjust rules for QDROs.
  9. Other vehicles
    1. Establish lifetime savings accounts by making a $500 government contribution for every child born in the US. 
    2. Expand 529 plans to provide for plans for the disabled.
So, there you have it. Next up, health care. What do you think so far? Which proposal is a real winner? And, by a real winner, I mean one that will allow more people to retire when they would like to while not adding to the federal debt.

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