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Congress takes aim at 401(k)s

By Jennie L. Phipps · Bankrate.com
Tuesday, May 31, 2011
Posted: 3 pm ET

Should Congress put limits or even completely do away with the tax incentives that make saving within a 401(k) or some other tax-advantaged retirement plan attractive in order to cut the deficit?

The Congressional Joint Committee on Taxation and the Treasury Department's Office of Tax Analysis conclude that these retirement planning programs will cost the federal government about $600 billion in lost revenue over the next five years.

Here's what they suggest instead:

  • Bipartisan Policy Center Debt Reduction Task Force -- Maintain existing accounts but cap tax-preferred contributions to the lower of $20,000 or 20 percent of income.
  • National Commission on Fiscal Responsibility and Reform -- Consolidate the various retirement accounts and cap tax-preferred contributions to the lower of $20,000 or 20 percent of income.

The American Society of Pension Professionals & Actuaries, or ASPPA, says the government's math is fuzzy because it doesn't accurately figure deferred revenue -- savers eventually take the money out and pay taxes on it. Based on its calculations, the government would only gain about 25 percent more in taxes and the price would be reduced income and security for people living in retirement.

A separate study by the Stanford University Graduate School of Business says that the introduction of 401(k)s has had an enormous impact on how people invest in stocks and bonds. At the end of World War II, individual citizens owned 90 percent of the stock market; by 2006, they owned only 30 percent. The other 70 percent was held by institutions, including mutual funds, insurance companies and pension funds.

Ilya Strebulaev, associate professor of finance and primary author of the study, recommends that tax reformers consider making the tax rate on capital gains equal to the tax rate on equities held in tax-advantaged accounts. Now, of course, the capital gains rate is 15 percent for most people -- less for low-income people, while the rate son equities in tax-advantaged accounts are the same as for ordinary income. This would level the playing field and potentially make it less attractive to hold stocks in a tax-advantaged accounts. He believes that among other things, holding stocks outside of institutional accounts would encourage individual investors to pay more attention to how their money is invested. "Institutional investors are very passive. They delegate their vote. It's not the best social outcome," Strebulaev says.

Strebulaev dismisses the idea of limiting the tax advantages of retirement accounts to increase revenue. "What I think what our research delivers is that all these small twists in taxation are very unlikely to work."

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533 Comments
deena
July 29, 2011 at 8:56 pm

Social security became a PONZI scheme when we allowed it to become the funding for all the freebies given out daily.. It was never meant to be for disability payments. Yet it is used every day as a disability fund for all who have an ache or pain and get a doctor to vouch for them. This Country is dysfunctional and everyone who came here because they were told it was, "The Land of the Free," Listen closely.......that does not mean that it is FREE TO LIVE HERE! Contribute. . .or go away with your hands in your empty pockets! OMG!

TheProfessor
July 29, 2011 at 8:51 pm

Tell the government and the IRS need to GET THE HELL OUT of our pockets, our wallets, and our investment portfolios. It's time to reign in the IRS and replace the corrupt tax code with the "Fair Tax."

Brian
July 29, 2011 at 8:14 pm

When does it stop? When do we put people in office that want what is best for us? Elected office needs to have the same or less benefit structures as all Americans. We have elected lawyers, and corrupt elite spoiled children into office on the basis of raising $ to afford the office. Is this democracy for the people? Hell no, and it will not continue until we modenerize the voting system and account for who is voting. The American people could have participation in this debt crisis, spending and any other issue before Congress. We could have a vote and voice directly to our representative. It's the 21 st century for God's sake. They waste at least 20% of the budget. Put somethnig in place that will give us a voice.
We should go to electronic photo ID internet elections by documented citizens under secure ID. They could use the local library computers and hold elections over a period of 3 days to give everyone a chance to vote regardless of whereabouts. They could be processed and verified in short order and their vote assigned to their local address by registration. Politicians don't want reform and secure ID it will make the process too honest. Shameful

Brian
July 29, 2011 at 7:40 pm

When does it stop? When do we put people in office that want what is best for us? Elected office needs to have the same or less benefit structures as all Americans. We have elected lawyers, and corrupt elite spoiled children into office on the basis of raising $ to afford the office. Is this democracy for the people? Hell no, and it will not continue until we modenerize the voting system and account for who is voting. The American people could have participation in this debt crisis, spending and any other issue before Congress. We could have a vote and voice directly to our representative. It's the 21 st century for God's sake. They waste at least 50% of the budget so pt somethnig in place that will give us a voice.
We should go to electronic photo ID internet elections by documented citizens under secure ID. You could use the local library computers and hold elections over a period of 3 days to give everyone a chance to vote regardless of whereabouts. They could be processed and verified in short order and their vote assigned to their local address. Politicians don't want reform and secure ID it will make the process too honest.

Roberto M. James
July 29, 2011 at 12:56 pm

Believe it or not but this action of attacking retirement accounts to increase revenue by ASPPA is already devastating United States Virgin Islanders working for their Government. This day, July 28th, 2011 will go down in History. The Governor of the United States Virgin Islands yesterday,with the support of the 29th Legislature of the United States Virgin Islands ( " Virgin Islands of the United States " ) arbitrarily and unconstitutionally destroy all of the agreement/ contracts negotiated on behalf of the employees of the Government of the US Virgin Islands. The Government of the United States Virgin Islands lashed all contractually agreed contracts to increase revenue. While the Governor claims that the Government is broke, he is continuing to hire people into unclassified position and the truth is, is that he's attacking our retirement / incentive programs to award his friends with lucrative contracts. He further took $500,000.00 dollars of the peoples money and invested it into his private house, accused the Inspector General Office of being to political when he was told to repay the money. AC, our contracts were entered into agreement by our Union and the Governor of the United States Virgin Islands (on behalf of the Government of the Virgin Islands of the United States) and is protected by the Constitution of the United States as provided by the Organic Act of the Virgin Islands. AC, corruption is rampant with collusion and contempt. A lot of criminal activity taking place here and the Courts are silent while the judges await reappointment. HELP, HELP, HELPPPPPPPPPPPPPPPP, AC

bill
July 28, 2011 at 9:01 pm

when the giant corporations wanted to ditch their pension plans as 'stranded' costs, they first gutted them by 'borrowing'(stealing, actually, because they never paid back) from them & then dumping them on the Federal Pension Guarantee Corporation, which means taxpayers pay the non-social security pensions of an increasing number of retirees. Whoever says we don't get it--that we can only balance the budget by cutting,not taxing, has drunk the hypnotizing kool-aid of The"Baugh" and the "Beck" and the right wing think tanks funded by the same Robber Corps that stole their own pension funds (and just plain dropped their fully funded or nearly fully funded ones in favor of adding to their bottom lines). We CAN'T fall below the amount of revenue we need to pay our obligations to these corporate workers who paid into the funds all their lives and were then trashed by their corporations, and that means if the revenue we're bringing in doesn't meet these obligations some tax is going to have to come from somewhere, or we have to starve our grandparents and parents. Probably a tiny 1% tax on the 60% of corporations who pay not one penny of income tax would suffice to pay these defidits, but our Corporate-bought Congress is not going to get it from their owners--they'll get it from us and all because we're too hypnotized to reform the campaign finance laws and to stop thinking we should give more marginal tax breaks to the Corps to coax itty-bitty marginal tax revenues from them,just based on the Beck 'n Baugh's bombast that it's true. After all 25% more than nothing is still nothing. The 401k is the companion idea to dumping pensions on the gov that the Corps and their hired Congress came up with to get us to fund our own pensions--the idea being wouldn't it be great to cut all the populace in on the potential profits of the majic Capitalist system?! And by the way, get a whole lot more investment in the Corps, so instead of stealing your pension illegally, they can get you to give it to them voluntarily, without Ayn Rand's proverbial gun to your head. Marvelous, No? Keep the cool aid coming! Oh, and those Tea Baggers you're thanking for defending your 401k against higher taxes? They'll sell you out in the end, because when taxes have to go up, and they will, tea Party will have to choose between caving in to taxing your defenseless individual account and taxing the Giant Corporate,Congress- backed wealth, de.fended by all the money, jobs blackmail,and guns in the world. The T.P. knows those guns are a lot bigger than theirs.

Ben in Virgina
July 28, 2011 at 3:17 pm

Next they will want to seize private gold like Roosevelt did in the 1930's and even silver since many can't afford gold since it is over $1600/ounce now. Maybe they will pull the same mass thievery that Bulgaria and Argentina did by "nationalizing" private retirement plans or demanding that all plans contain a fixed percentage of government bonds or other debt instruments to provide the Feds with more cash to waste on graft and corruption.... Social Security was a Ponzi Scheme and now the time has come to pay up!!!