Thursday, May 24, 2018
Business

Tax incentives for retirement savings defended

As federal policymakers search for ways to trim the nation's long-term deficit, they are increasingly eyeing a piece of the estimated $136 billion in tax incentives for retirement savings.

The vast majority of tax incentives are for employer-sponsored defined-benefit and defined-contribution plans, such as 401(k)s. But as analysts warn that a large and growing share of Americans are underprepared for retirement, the lucrative incentives have come under attack as being unfairly tilted toward the affluent.

Responding to that perception, some elected officials and researchers have proposed limiting or reconfiguring the incentives. But groups that advocate on behalf of the current system of retirement savings are eager to paint what they say is a fuller picture of exactly who benefits.

In a report released last week, the American Society of Pension Professionals and Actuaries says the vast majority of benefits from retirement tax incentives, 71 percent, flow to working families earning less than $150,000 a year. By contrast, the organization pointedly notes, just 8 percent of the tax benefit for the capital gains tax break goes to families making less than $150,000 a year.

"If they want to go after the Mitt Romneys of the world to raise revenue, they should go after the capital gains tax break," said Brian H. Graff, ASPPA's executive director and chief executive.

ASPPA argues that when calculating who benefits from retirement tax incentives, many analysts don't take into account that the incentives are deferrals, not exemptions. For example, someone in the 35 percent tax bracket can save for retirement with pretax dollars. That shields that amount of money from the 35 percent income tax. But those taxes are paid — sometimes at a lower rate, depending on one's total retirement income — when the money is withdrawn in retirement.

The group also argues that because of federal nondiscrimination rules, which essentially ban top company officials from receiving tax-preferred retirement benefits that are not proportionately available to other employees, tax incentives create a powerful incentive for business owners to provide retirement benefits for workers. Any reduction in those incentives, ASPPA argues, would lower benefits for the rank-and-file. And workers are 14 times more likely to save through a workplace plan than their own IRAs, ASPPA says.

"The employer-based retirement savings tax incentive is the efficient and effective way to help Main Street save for retirement," the report concludes.

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