With the U.S. Congress down to the nitty-gritty of deficit reduction, the nonpartisan Employee Benefit Research Institute took another look at suggestions to cap tax-advantaged contributions to 401(k)s and other retirement plans to the lower of $20,000 or 20 percent of income.
We've talked about that, and it's clear that most people here think it's a lousy retirement planning suggestion. So does the EBRI. Granted, the EBRI is supported by a coalition of insurance and investment companies that have a lot to lose if 401(k)s become less popular. But what the EBRI uses as ammunition to argue against capping 401(k)s is straightforward.
According to calculations by the EBRI's actuaries, the proposed cap would, as you might expect, affect the highest-income workers the most, but it would also cause a very big reduction in how much the lowest-income workers were able to save. The reason that's true is that most of the lowest-income workers also are the youngest, and they are likely as they age to earn more. And because they have the longest time to save, a cap applied this year or next would affect them for the longest period of time.
The calculations take into account the amount saved and the typical employer match. Assuming that the cap was put in place in 2012, the EBRI calculates that the highest earners ages 26 to 35 would lose the ability to save 12 percent, while the highest earners ages 36 to 45 would lose 15.1 percent. Those ages 46 to 55 would lose 13 percent, and those 56 to 65 would lose 8.6 percent.
Among the lowest earners, those ages 26 to 35 would lose almost 10 percent, while those 36 to 45 would lose nearly 11 percent. Low earners 46 to 55 would lose 7 percent and those 56 to 65 would lose a little more than 4 percent.
At a time when encouraging people to support themselves in their old age is increasingly important, making these kinds of cutbacks may not be the smartest tax and social policy.