Retirement planning vehicles of various types are under siege from different quarters -- again. The Committee for a Responsible Federal Budget, or CRFB, posted a blog Friday about the preferential tax treatment of individual retirement accounts, noting that they will cost $15 billion in lost revenues this year, or more than $250 billion over 10 years. It was one in a series of blog posts by the CRFB analyzing various tax breaks.
IRAs "are only used by 5 percent of workers, and the benefit accrues largely to the wealthiest taxpayers," Marc Goldwein wrote in an email to me with a copy of the report.
The report was even-handed, an objective appraisal of the IRA's tax characteristics, and it referenced numerous recommendations from policy organizations spanning the political spectrum without advocating a particular course of action. So I asked Goldwein, who is the senior policy director of the organization, what its position is, and he replied that the committee doesn't take specific positions, though its analysis uncovers inefficiencies in the system.
"Me personally, I think there is some value to having tax-preferred retirement savings accounts," he says. "But do we really need IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s and various other arrangements? And do we really need to tax preference $20,000-plus of savings each year? ... There is an opportunity, I think, to consolidate various accounts and limit contributions while continuing to support retirement savings," he adds.
That seems like a reasonable approach.
An incendiary attack
Then there was the scathing blog post appearing this week on BillMoyers.com by Lynn Stuart Parramore, titled, "How America's 401(k) revolution rewarded the rich and turned the rest of us into big losers." As the title suggests, Parramore rips into these plans, offering her rather distorted perception of how they came to be and concluding that they should be eradicated. In her words, "It's time to say goodbye to the failed 401(k). And don't let the door hit you on the way out."
In her version of the 401(k)'s evolution, she recounts, "Instead of having predictable streams of income from traditional pensions, ordinary people with little financial expertise would suddenly transform themselves into financial gurus, putting money aside and managing complicated investments in tax-deferred accounts." Her solution would be to adopt labor economist Teresa Ghilarducci's plan to phase out 401(k)s and create a new government-run retirement plan to supplement Social Security.
I'm sensitive to America's retirement predicament, but it's tough to accept a specious argument that gloms onto a fairy tale -- the once upon a time where everyone had a pension and a wonderfully secure retirement. "Most people didn't even have a pension to start with," says Nevin Adams of the Employee Benefit Research Institute, or EBRI, which tracks participation rates in various pension schemes. In 1979, roughly 28 percent of private-sector workers participated in an old-fashioned defined benefit pension, and the numbers have dwindled since, replaced by those "failed" 401(k) plans.
EBRI, by the way, released a new report this week, "How does household income change in the 10 years around age 65?," showing how people of ages 65 to 74 at various income levels are faring versus when they were 55 to 64. It turns out that only about 15 percent of their income, on average, comes from a pension or annuity. That's the demographic that is still supposedly flush with pension cash.
Let's eradicate the distorted pension illusion instead of the 401(k). "The reality is that most people never had a pension, those who had a pension weren't getting anything like the full benefits from them, and -- in those good old days, nobody had a 401(k) to fill in the difference," says Adams, who is co-director of EBRI's Center for Research on Retirement Income.
I would not embrace a government-run retirement fund to supplement Social Security. Even with all their warts and flaws, 401(k) plans and IRAs are a great way to achieve financial independence. You don't have to "transform yourself into a financial guru," but it is in your best interests to learn something about investing and maximize your opportunities to save in these tax-favorable vehicles.
It's not rocket science. It's the average worker's best opportunity to amass some serious wealth if they take advantage of it.
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Barbara Whelehan is a co-author of "Future Millionaires' Guidebook," an e-book for Gen Y by Bankrate editors and reporters. It is available at Amazon, Barnes & Noble, iBookstore and other e-book retailers.