Eliminate the 401(k) Tax Break?
I wouldn’t have thought the testimony of a single person could have caused this much hubbub. I must have been asked a dozen times over the past few weeks about it.
Someone testified to Congress that the tax deduction for 401(k) plans ought to be eliminated. And, on top of that, it was reported that the chairman of the committee was interested in the proposal.
I first heard about this when someone sent me an article from Workforce Management. The article referenced testimony from Teresa Ghilarducci, a professor of economics and the Director of the Schwartz Center for Economic Policy Analysis (SCEPA) at The New School for Social Research in New York City. Ghilarducci proposes eliminating the tax breaks associated with 401(k) plans. Instead, she proposes that everyone be required to contribute five percent of their income into a retirement account administered by the U.S. Social Security Administration, which would be invested in government bonds.
What set this story alight is that George Miller, Chairman of the Committee on House Education and Labor was said to be “interested in pursuing it,” and that he was “clearly against continuing tax breaks as they currently exist.”
So, should we all cash in our 401(k) accounts and run for cover? (Not that we’d get that much if we cash out now, but you know what I mean.)
No, don’t panic. This is one of several proposals made to help Americans out with their retirement savings plans. It just happened to be the most newsworthy in that it was fairly detailed, and pretty radically different from what we currently have.
Here’s a look at some proposals that range from the very modest to others that include these major variables: (1) will proposed savings be voluntary or mandatory; (2) will the savings vehicle of choice be something we already have such as 401(k) or IRA accounts, or something new such as Individual Contribution Accounts (a term you may start hearing about); and (3) what investment(s) will be dictated or allowed? Congressman Miller recently came out with a statement saying that he does not support abolishing 401(k) plans, or changing their tax status.
Crisis is over, right? Well…
Don’t forget that there are still several proposals out there to overhaul what’s perceived by some as a failure of 401(k) plans. Lots of folks who thought they would have enough saved for retirement are now finding that it’s nowhere near enough. What frequently happens after events like this current market downturn is that a knee-jerk fix will be put into place, typically of a kind that will overcorrect for what were seen as the failings. A number of the proposals would mandate that all workers save at least at some level. Also, some proposals direct that the savings into investments managed by the government, either by the Social Security Administration or the agency that handles the government’s Thrift Savings Plan. A look at President-elect Obama’s plans show that he wants to give all employees access to IRAs through their employer plans, if they don’t already have access to some other type of retirement plan.
What can we read in all these tea leaves? I think it likely that the norm in retirement savings will become an automatic contribution, either to an IRA or to a 401(k), unless an employee elects not to make one. I think it probable that employers will have the duty to select investments for employees’ contributions, although it’s certainly possible that the investment choice will be dictated. I’d bet against the government being the recipient of the contributions, although I’m not ready to rule that out, especially for those who make default contributions. As to when this all might happen, I’d put it at the year 2011, maybe 2012. There’ll be other, more important fish to fry before then, unless the economy becomes brighter in the next few months and health-care reforms magically pass with short debate.
Change will come. But your 401(k) is safe for now.