Two economists, representing opposing ideological perspectives, have jointly proposed in a research brief published in January that the federal government should cease permitting pre-tax contributions to retirement savings, advocating for the abolition of both the 401(k) and Individual Retirement Account (IRA).
Alicia Munnell, who served as an assistant treasury secretary during President Clinton’s administration, collaborated on this proposal with Andrew Biggs, a senior fellow at the right-leaning American Enterprise Institute. Their argument stems from the assertion that allowing individuals to shield their retirement funds from taxes primarily benefits the affluent segment of society. They suggest redirecting the approximately $200 billion annually lost in tax revenue towards bolstering the underfunded Social Security program.
The proposal has sparked considerable attention, with one social media post amassing over 700,000 views. Munnell and Biggs contend that the current tax-favored retirement account system disproportionately benefits wealthier Americans. For instance, data from the Survey of Consumer Finances indicates that households in the top 10% income bracket possess a median retirement account balance of $559,000, with 93% of such households holding retirement plans. Conversely, middle-income Americans, falling within the 40th to 60th income percentiles, exhibit a median retirement plan balance of merely $39,000, and nearly half of this demographic lacks any retirement savings.
The looming retirement savings crisis in America is a growing concern among researchers, with less than half of the population having retirement accounts, and even fewer among those nearing retirement age. Given the declining prevalence of traditional pensions, 401(k) and IRA plans emerged in the 1970s as vehicles for individuals to accumulate retirement savings. However, despite the tax advantages they offer, a significant portion of Americans fails to utilize them, with nearly half lacking access to workplace retirement plans.
Critics argue that lower-income individuals often prioritize immediate financial needs over retirement savings. Conversely, wealthier Americans are more inclined to maximize the tax benefits afforded by retirement accounts. Consequently, the bulk of the tax subsidies accrue to the top income brackets, further exacerbating wealth inequality.
Although the proposal to abolish tax-favored retirement savings is met with opposition, some industry experts argue that such plans are crucial in providing dignified retirements for millions of Americans. They assert that without tax incentives, employers would be disincentivized from offering retirement benefits, thereby diminishing retirement security for middle- and lower-income workers.
Despite the unlikelihood of immediate congressional action on this proposal, Munnell and Biggs advocate for its inclusion in policy debates. They propose alternative measures, such as capping tax subsidies for high-value retirement accounts or adjusting withdrawal requirements, to better align tax benefits with responsible saving behavior.
In summary, the debate surrounding the abolition of tax-favored retirement savings underscores the complex interplay between tax policy, retirement security, and income inequality in America. While economists advocate for reforms to ensure a fairer distribution of benefits, the entrenched interests and structural dependencies of the retirement savings industry pose significant obstacles to meaningful change.