Restructuring Incentives for Savings and the Agenda of the “Super-Committee”

Salisbury

A retirement-related proposal from former OMB Director Peter Orszag (now of Citicorp), Bill Gale of Brookings, and Jonathan Gruber of MIT and NBER that was published in 2006 is being put “on the table” as part of the deficit reduction/tax reform activity for this year and beyond. The just-created “Super-Committee” that must come up with a deficit reduction plan by late November will be asked to consider changing current savings incentives in the tax code.

Significantly, both House Ways and Means Chairman Camp, and Senate Finance Chairman Baucus are among the “12 Apostles” (as the 12-member “Super-Committee is called), making it possible—and possibly  likely—that the group will consider some  tax changes as part of the deficit package. Many interests will be pushing for consideration of their “reform” proposal.

Special commissions of 2010 proposed a change in the defined contribution and IRA limits that would first combine them, and then limit them to $20,000 or 20% of income per year, whichever is lower.

EBRI has published preliminary  analysis of the projected impact of the 20/20 proposal  on employees’ retirement account balances, and is now expanding that analysis to include the Orszag/Gale/Gruber proposal, which they designed to redirect tax incentives to middle- and low-income households (a link to their full paper is online here; a separate pdf is available here).

That proposal, in short form, would:\

(1) Make all contributions to a retirement plan after-tax;
(2) Create a 30 percent government match in the form of a tax credit;
(3) With the match limited to the “minimum of either: a) 10 percent of adjusted gross income, up to a maximum of  $200,000, on which federal income taxes are imposed; or b) $20,000 for 401(k) accounts and $5,000 for IRAs (married couples could contribute twice this amount  based upon household income);
(4) Deposit the government match directly into the retirement account as pretax income, subject to taxation upon withdrawal.

Any significant changes in the tax treatment of savings incentives, whether for retirement or other needs, would affect both employer and employee behavior. EBRI databases and models make analysis possible that others are not able to conduct, and that is what we will undertake in this case, seeking to fulfill our mission of allowing more informed plan design and policy decisions based upon the facts.

Given the challenging budget and deficit outlook painted by the mid-year budget review just released by the Congressional Budget Office (www.cbo.gov), new proposals for changing the tax treatment of incentives for most employee benefit programs can be expected to arise on a regular basis, and proposals for changes from past decades can be expected to re-appear as well.

The tax and regulatory environment for employee benefits—and thus the decision framework for employer and individual decision-making—are likely to become more uncertain with each passing month in the decades ahead. The CBO report makes it clear that the work of the “12 Apostles” is just the beginning.

Stay tuned. Let me know your thoughts. Salisbury@ebri.org or 202-775-6322.

Dallas Salisbury
August 24, 2011

About ebriorg
President and CEO, EBRI

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