Speculating on the Effect of the Gang of Six Proposal on Retirement Savings

Just in case you have been in hiding, there is this bi-partisan group of Senators who call themselves the Gang of Six. They don't have matching tattoos, they don't have gang colors, and that we know, they don't carry concealed weapons. The members of the Gang are Saxby Chambliss (R-GA), Tom Coburn (R-OK), Kent Conrad (D-ND), Mike Crapo (R-ID), Dick Durbin (D-IL), and Mark Warner (D-VA). And, over the last few days, the Gang of Six has put together a proposal that from the way it is being touted in some circles as certain to save the world.

It all depends who you listen to. It either cuts taxes or increases taxes. It is either good for millionaires and billionaires or it is bad for the millionaires and billionaires.

All those people we are listening to -- they don't know. I don't even think the Gang of Six (GoS) members know. They have this conceptual plan. They have a summary. It has a lot of vagaries to it, and in my opinion, those vagaries are the clear part of the plan.

The Gang of Six is now rushing with all deliberate speed to get a bill written. This writer will not be surprised if the size of the bill exceeds 1000 pages. In fact, I wouldn't fall flat on my face in amazement if this bill (assuming that it gets written) exceeds 5000 pages in girth. But, it will be important, and it will need to be voted on quickly. Surely, all of the members of Congress will study the bill carefully before voting on it. And, surely, the President will study the bill carefully before signing it if it passes both houses of Congress. Surely, you don't believe either of those statements.

So, why am I blogging about this?

Well, the bill summary says that it is going to close tax loopholes. One of the loopholes that it seems poised to close (I say this based on the published bill summary and on statements from several of the Gang members that they looked to the Simpson-Bowles Commission in this regard) is that oh so evil one for retirement savings.

Yes, retirement savings get various types pf preferential tax treatment under the Internal Revenue Code, and that tax treatment hasn't changed significantly in 5 years. Retirement industry geeks know that workers generally can save on a tax-favored basis $49,000 per year ($54,500 for those born in 1961 or earlier) in defined contribution plans. Of that $49,000, up to $16,500 can be through some combination of pre-tax or Roth in 401(k) plans. The remainder would come from employer contributions (yes, I know that pre-tax and Roth are technically employer contributions) or traditional employee after-tax contributions.

For most participants, this is their current retirement benefit from employer plans. The number of open defined benefit plans continues to decline, especially after the Pension Protection Act of 2006 (PPA) managed to protect no pensions.

So, what do I think is happening to retirement plans? Simpson-Bowles suggested that the $49,000 limit be cut to $20,000. Will GoS follow suit? I think so. According to a recent Mercer survey (the link does not appear to be publicly available and the material is copyrighted, so I will leave it to you to contact Mercer if you would like all the detail), "[A] good retirement savings or pension plan today ranks as the second most important element of the employee value proposition for US employees ... ." 43% are confident that they are doing enough to financially prepare for retirement. And, now to make matters worse, the government is going to take away some of the tax incentives for saving?

Quoting the inimitable Jeff Spicoli from the 1983 classic "Fast Times at Ridgemont High", "Whoa, dude!"

Social Security seems destined to be cut back. Tax-favored retirement savings opportunities appear ready to be cut back. Congress already did its best to kill defined benefit plans. Only through means of wealth accumulation not available to most of us will people be able to prepare efficiently for retirement.

But, there is one alternative. Congress still has a phenomenal retirement program for its Members. It would not, and in fact, could not, exist in the private sector.

So, that is the key to our future retirements. We should all become members of Congress.