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401(k)s and the federal deficit

By Kay Bell ·
Tuesday, May 31, 2011
Posted: 1 pm ET

Retirement plans have been getting a lot of scrutiny as Congress fights over ways to reduce the deficit and come up with a new federal budget. This attention isn't new. Remember a few years ago when then-President George W. Bush talked about the cost savings of privatizing Social Security and how quickly that idea was shot down?

Now it's the cost of private, not government, retirement plans that are being viewed as costly to Uncle Sam's bottom line.

According to data compiled by the Joint Committee on Taxation and Treasury, 401(k) retirement plans are the third most expensive tax expenditure. A tax expenditure is a loss incurred by the Treasury because of tax deductions, exemptions or credits.

In the case of 401(k) plans, government number crunchers say these popular workplace retirement savings will cost the U.S. Treasury an estimated $67 billion in 2012. Official revenue loss projections over the next five years total about $600 billion.

That's a big number, but still small potatoes when compared to the $300 billion a year in forgone tax money from the tax-free treatment of employer-provided health benefits and the mortgage-interest deduction for homeowners.

Still, as Congress scrounges for every cent it can find, every revenue loser is getting another look.

One group, however, says lawmakers should look elsewhere.

The American Society of Pension Professionals and Actuaries, or ASPPA,  has conducted a study that calls the government's estimates into question.

Brian Graff, executive director and chief executive officer of the Arlington-Va.-based pension professionals group, says that since 401(k)s have only been around for a few decades, the value of the contributions and interest earnings still far exceeds the value of distributions to retirees. That means traditional methods of valuation, he says, overstate the cost of retirement savings incentives and therefore the savings that would result from slashing the incentives.

The ASPPA study, says Graff, shows the real cost of retirement savings incentives to be 55 to 75 percent lower than claimed by budget hawks, meaning that proposed cuts will not save nearly as much as advertised even as they jeopardize the future of 401(k)s and other retirement plans.

Graff also makes another point: With the future of Social Security still a concern, it's not a good time to start taking aim at private efforts to get individuals to save for their own retirements.

From a tax standpoint, I also must note that while the untaxed contributions to, and tax-deferred earnings in, 401(k) plans do hurt the Treasury right now, Uncle Sam eventually will get his money from these retirement accounts.

And the taxes that will be paid on 401(k) distributions will be at the ordinary income tax rates. If you believe that taxes eventually will go up for everyone, that means that the plans could pay off nicely for Uncle Sam when the IRS gets around to collecting on them.

Now I know that doesn't do much for the current budget and deficit problems. But I agree with the American Society of Pension Professionals and Actuaries here.

Leave 401(k) plans alone. There are plenty of other tax-raising targets out there that deserve attention right now.

Do you contribute to a 401(k) plan at work? Would you stop if the tax benefits were eliminated?

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June 01, 2011 at 2:52 pm

And yet, the government still refuses to touch those who are ultra-rich and/or the corporations who are not paying their taxes. They're collectively looking in every nook and cranny of what once was the middle class, and now the lower class and our senior citizens, for every nickel and dime that simply isn't available.

No wonder I can no longer find change under my sofa cushions.