I hope you did a double take at the title of this piece. With an estimated 7,000 Americans reaching retirement age every day for the next decade and a half, and 60 percent of workers currently having less than $25,000 in savings and investments, who could possibly think it’s a good idea to create any disincentives for retirement savings?
Apparently the White House does.
The President’s budget proposal for fiscal 2014 suggests limiting the tax deductibility or exclusion for contributions made to individual retirement accounts, defined benefit plans, or defined contribution plans for anyone who has accumulated amounts enough to create an annual benefit indexed for inflation of $205,000, payable in the form of a joint and survivor benefit starting at age 62. Under current conditions, that means the maximum accumulation for a 62-year-old would be about $3.4 million.
That’s a proposal that only affects the rich, right? And shouldn’t those who have been more fortunate pay more? I absolutely support progressivity in the tax code and believe that the affluent should pay a little more than they currently pay (which is still too much without any meaningful government investigations into Social Security disability, Section 8 and food stamp fraud). This proposal, however, is fraught with problems. It will ultimately impact more savers than you think. The cap will fluctuate based on discount rates over time. In fact, the Employee Benefits Research Institute has done a preliminary analysis suggesting that even in recent years the $3.4 million cap mentioned earlier could have been as low as $2.2 million based on available annuity rates. They also suggest that, at that threshold, as many as 6 percent of retirement savers who are younger now could be affected by the inflation-adjusted cap by the time they reach retirement age.
Administratively, the proposal is a disaster. Think about the constantly changing maximum accumulation thresholds and how those will be managed, communicated, and misunderstood from year to year. Make retirement saving confusing, and people won’t save as much, even at higher income levels.
An editorial last month in The Washington Post called the White House’s startling plan “Obama’s modest proposal to cap retirement entitlements.” We’re not talking about “retirement entitlements” here; what we’re talking about are personal retirement savings. There’s a big difference. These funds represent the life’s work of the successful people in this country who have built businesses, run family farms, created jobs and have been diligent about saving for their retirement. How can we talk about the retirement crisis in this country and in the same breath create new roadblocks to those who are trying to plan effectively for their futures?
To me, this is not a partisan issue. The exceptional “American experiment” has always functioned best when the rising tide lifts all boats – when we equalize opportunity, not outcomes. The recent trend toward trying to guarantee equal outcomes is leading us down a dangerous path, not because the impulse to do so is ignoble but because the strategy simply does not work for any segment of society. If you think I’m wrong, just take a look at the no-growth economies and hyper-unemployment our friends in the Euro zone enjoy. The Brits were the smartest: cheers to the late Margaret Thatcher who voted to keep the British Pound. History will prove that she was not only an able statesman, but she understood economics at its core.
The American College convened a Forum on Retirement Security on Capitol Hill last month. Keith Hickerson of my team led in-depth discussions with legislative staff, policy makers, think-tank representatives and academics on what types of policy approaches might fundamentally change the trend of retirement savings in this country. What we found is encouraging: there is more agreement than disagreement on what types of legislative solutions will work. The New York Life Center for Retirement Income at The American College is leading that effort. Our new Doctor of Philosophy in Financial and Retirement Planning program will help shape public policy in the future.
If you think new caps on retirement savings are moving us in the wrong direction, let your member of Congress know. As always, I’m interested in your thoughts as well, whether we agree on this particular issue or not. The broad issue of how to build retirement security in this country is a critical dialogue to have, and I’m interested in what you think!
Larry Barton, Ph.D., CAP, is president, CEO of The American College and holder of the O. Alfred Granum Chair in Management at The American College, based in Bryn Mawr, PA. Contact Larry Barton at [email protected]