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Congress takes aim at 401(k)s

By Jennie L. Phipps ·
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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July 28, 2011 at 9:51 am

What most people don't get is that we could eliminate EVERY government program except Social Security, Medicare, and the Military and we'd STILL run a deficit. That means NO highways, no air traffic controllers, no courts, etc.

Greedy old people are sucking the lifeblood out of this country with their entitlement programs. We should be investing in education for the YOUNG and for the FUTURE, not for people whose lives are mostly over.

Nowhere to go
July 27, 2011 at 10:23 pm

401(k)s, pensions, privately held gold... They are all a potential source of income for our governmet that wishes to be more socialistic. We've run out of SS money, private savings is mighty inticing... Just ask Bolivia, Argentina, Bulgaria,...

July 27, 2011 at 8:54 pm

Is this not what Lyndon Baines Johnson and Democrat controlled congress did to Social Security? AND you thought when Democrats vehemently object to privatizing Social Security it had to do with stock market risk! No just that they would not then be able to get their hands on it, as they now want to do with 401K Plans. IF WE DO NOT STOP THESE THIEVES NOW WE HAVE NO FUTURE! Thank you TEA PARTY!!

July 27, 2011 at 6:25 pm

Hey Delivery Guy, you are apparently OK with taking from other taxpayers so your taxes can be deferred to a later date, not. If I understand your point a socialist policy is OK if you're the beneficiary. the Government wouldn't be taking from you they would not continue to GIVE you something

July 27, 2011 at 5:02 pm

What D.C. doesn't get is that one needs to CUT spending in order to get finances under control. This is where the ultimate failure lies.
We can either choose to take a big 'hit' by eliminating SO many entitlements (when we're born we're not guaranteed anything but to die - not health care, food, retirement, car, house, etc), or take an even bigger 'hit' when the economy collapses. Too many American citizens are choosing to believe that someone else be responsible for their care. I could go on, but am depressing myself!

July 27, 2011 at 4:57 pm

time to put savings in sock drawer

July 27, 2011 at 2:56 pm

How long are we gonna let the govt pillage the middleclass, they just keep taking and taking while the rich are pampered. The Rich's amount of money keeps increasing while the middle class' keeps shrinking. Doesn't this show an obvious wrong being done by our govt.?

The Delivery Guy
July 27, 2011 at 8:40 am

"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."

I think the developement OF the mutual fund in I believe it was 1940 might have had more to do with it. Inexperienced investors getting an affordable way to get investment management was appealling to many.

As to this article, just another example of the socialist administration we have trying to take from those who save and earn to pay for their socialist master plan.

July 27, 2011 at 8:04 am

Yes, it is all truth and still, people vote for this corporate lackey Obama and all the cowards that surrounding him

Your 401k is a New Revenue Source
July 27, 2011 at 5:48 am

Funny--we're encouraged to put some away for a rainy day, and then when we do, the government proposes using our personal savings as a potential source of revenues.

From now on, whenever I hear any government source encouraging me to save my own money, I'll understand why.