Hi Friendos,
The last few weeks I’ve discussed the benefits of saving for retirement into one type of tax-sheltered account vs. another. I wrote: “I believe the existence of such accounts is terrible policy and we should get rid of all of them!”
Today I’d like to spotlight some research that supports my perspective. I encourage you to take a look and decide for yourself.
I don’t think people should be expected to willingly forego putting funds into a tax-sheltered retirement saving account when they have the option to do so. Not even this doctor, who makes more than $500,000 a year and, between him and his spouse, can stuff money into 9 different tax-sheltered accounts. I do think we should be honest that these tax breaks benefit high-earning wealthy people and do not advance any legitimate policy goals.
In January, Alicia Munnell had a new article out, co-authored with Andrew Biggs and Michael Wicklein, titled “The Case for Using Subsidies for Retirement Plans to Fix Social Security.” You can read the brief here and the full paper here. I first saw Munnell’s work when I was in college, so this caught my eye.
The article asks several questions and provides research-based answers.
“Who Gets the Tax Expenditures?”
The tax breaks provided by retirement saving accounts (401k’s, 403b’s, IRAs, etc) are a type of expenditure: government is willingly giving up taxes it would otherwise have collected on income. Who gets those expenditures? High earners who have more access to such accounts and more income to put into them. The authors point out that recent legislation (during the Trump and Biden administrations) have exacerbated this problem. The 2019 SECURE Act and the 2022 SECURE 2.0 Act both raised the age at which people have to take required minimum distributions and the SECURE 2.0 increased the maximums for catch-up contributions for people aged 60-63. An increase in contribution limits only benefits someone already contributing the maximum. This is why it is overwhelmingly high-income people who benefit from this Biden-era legislation.
“What Do the Tax Expenditures Buy Us?”
The authors ask whether “these expenditures accomplish some broader social goal such as increasing national saving or expanding the share of workers covered by a retirement plan.” So, are we accomplishing those goals?
The authors explain why economic theory does not tell us one way or another if federal tax preferences will increase net total saving, so we should look to empirical evidence for answers. They conclude that the “weight of the evidence indicates that tax incentives do not increase total saving in a meaningful way.” Further, “little research has produced any evidence of a relationship between tax expenditures and retirement plan coverage” and “the percentage of workers participating in a retirement plan has not increased over time.” In other words, in exchange for the tax giveaways of these retirement accounts, we are not increasing national saving, we are not increasing access to retirement plans, and we are not increasing participation in retirement plans. It’s just a giveaway.
The authors write: “the current approach of offering tax expenditures is expensive and does not appear to work.” They go on to outline how straightforward it would be to get rid of or curb these tax breaks and suggest a better use for the money would be for Social Security, to “reallocate existing funds that do not significantly improve retirement security to a program that indisputably does.”
The bills comprising SECURE 2.0 passed the House 414-to-5 and unanimously passed the Senate. The White House touted its “efforts to improve the financial resilience of American workers and their families.”
How did the press report on it at the time?
- CNBC: “The goal of Secure 2.0 is to build upon changes implemented by the 2019 Secure Act, such as expanding retirement-plan access to more workers.”
- New York Times: “New Spending Bill Makes It Easier for Americans Saving for Retirement”
- U.S. News & World Report: “The SECURE Act 2.0 takes aim at expanding Americans’ retirement savings options,” and “Uncle Sam is taking active steps to help Americans amp up their retirement savings game.”
- Fox Business: “Secure 2.0 Act will help Americans build emergency savings: Here’s how”
- Forbes: “SECURE 2.0 Act Creates New Ways To Fund Emergency Savings”
They could have written “Congress and the White House Increase Tax Breaks for the Wealthy” but they didn’t. When you read about tax-advantaged retirement accounts, I recommend a healthy dose of skepticism if someone says their function is to help all Americans.
-Stephanie
Frequently Taxed Questions 