This week, President Barack Obama will unveil his long-delayed budget proposal to Congress. It involves a couple of changes to the retirement system, according to reports by the Associated Press and other news organizations.
As expected, Obama proposes using "chained CPI" as a cost-of-living measure for increasing Social Security benefits, which is a less generous inflation adjustment than the one currently in use. That change would cut spending by $130 billion over 10 years, according to the Wall Street Journal.
Chained CPI is effectively a cut to the Social Security program. But this is a concession to the political right.
The other change, a concession to the left, caps the amount of funds that can accumulate in tax-preferred retirement accounts at $3 million, according to the Journal. This limit would raise $9 billion over 10 years.
Public discussion 'rigged'
In a three-part series appearing this week on Salon.com, Michael Lind, co-founder of the New America Foundation, addresses both aspects of the retirement system. He says public discussion about Social Security is rigged "to the detriment of most Americans and to the benefit of the rich and the financial industry." Obama's use of the chained CPI inflation measure "cheats elderly Americans out of the benefits they were promised," he writes.
Instead of being subject to benefit cuts, the Social Security program should be expanded, he argues. Yet expansion has become a taboo topic that is rarely mentioned.
Meanwhile, tax-favored private components of the retirement system should be abolished -- or at least curtailed, Lind writes. "If any tax-favored private savings plans are to exist at all, there should be strict contribution limits -- say, $5,000 per year -- to prevent the rich from squirreling away money and benefiting from compound interest at the taxpayer's expense."
Actually, limits were imposed on contribution levels during the Reagan era, with passage of the Tax Reform Act of 1986. Prior to enactment of TRA86, people could contribute the lesser of 25 percent of compensation or $30,000, but the act drastically reduced contribution limits to $7,000 in 1986, indexed to inflation.
"What it did was fuel executive/small-business owner interest in other programs that would allow them to actually replace a reasonable amount of their pre-retirement income in retirement," says Nevin Adams, director of education and external relations at the Employee Benefit Research Institute. "It would be nice if people would remember that these tax deferrals are just that -- folks get a temporary break on taxes because they voluntarily chose not to take some part of their current compensation in cash. It will come 'out' at some point -- unfortunately beyond the arbitrary 10-year budget accounting window -- and those deferred taxes will be paid."
Ticket to wealth for average guy
I sympathize with Lind's desire to expand Social Security. But why would Lind want to "abolish the 401(k) plan," which he calls for in part two of his series. He says these plans' benefits "chiefly go to the members of the top two income quintiles."
I don't believe that's true. Eight out of 10 Americans who participate in a 401(k) plan make less than $100,000, according to an analysis of figures from the IRS' Statistics of Income Division by the American Society of Pension Professionals & Actuaries.
The 401(k) plan gives ordinary Americans at every income level the opportunity to accumulate some real money on a tax-favorable basis. It democratizes wealth, makes it possible for average people to exert some control over their future. There are safeguards in place -- in the form of nondiscrimination rules and tests -- to prevent highly compensated employees from benefiting disproportionately more from these workplace programs than the rank and file.
"People all-too-frequently forget the important role that employers, including small-business owners, play in sponsoring these programs, in promoting them and in contributing to them," says EBRI's Adams. "And they also seem to forget that outside of these programs, there doesn't seem to be very much savings going on, much less retirement saving."
401(k) plans are a wonderful retirement planning tool, and no one should take them away from us or limit our contributions to them. Nor should anyone try to limit how much we can keep in them.
What do you think? Should 401(k) plans be eradicated? Are you unhappy with the budget proposals that affect our retirement plans? Or do you think they're fair?
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Barbara Whelehan is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It is available at Amazon, Barnes & Noble, iBookstore and other e-book retailers.