Looks like 401K plans have a target on their account statements. By some strange coincidence a Danish study criticizing the tax credits for 401K plans appeared in the New York Times, The Atlantic Monthly, and Time within 24 hours of each other.
The NYT published the story "Study Questions Tax Breaks’ Effect on Retirement Savings" on November 25:
"Every year, the government spends more than $100 billion on tax breaks to encourage Americans to save more for retirement. But a new study suggests such provisions may have little effect on the amount Americans save.
The finding has particular relevance as Congress looks for ways to raise revenue by reducing tax breaks as part of the year-end budget negotiations..." Article
That was the opening jab. The Atlantic Monthly followed up with the haymaker with the headline "The 401(k) Is a $240 Billion Waste" and the sub-headline "Why subsidize retirement saving if the subsidies don't work?". The Atlantic argued:
"Imagine there were no 401(k)s. You wouldn't stop saving for retirement, right? Right? Don't worry, I won't tell Suze Orman. Not that CNBC's personal finance guru would get mad at you -- according to a new paper, most households wouldn't sock away any less for their golden years if we eliminated 401(k)s. Which raises a $100 billion question...
Why subsidize retirement saving if the subsidies don't work?
"As far as tax expenditures go, the one for retirement savings is a biggie. Remember, "tax expenditure" is just econospeak for the various deductions, exclusions, and preferential rates -- in other words, subsidies -- that litter the tax code. According to the Congressional Budget Office (CBO), excluding pension contributions and earnings from taxes will cost us about 1.2 percent of GDP over the next decade, or an average of $240 billion a year. That's a lot of spending -- that's what tax expenditures are, just disguised spending -- without much bang for the buck. Maybe just a penny's worth.
In fact, one penny's worth is exactly how much extra saving a dollar's worth of retirement subsidies produced in Denmark, according to the recent paper by Raj Chetty and John N. Friedman of Harvard, Soren Leth-Petersen and Tore Olsen of the University of Copenhagen, and Torben Heien Nielsen of the Danish National Centre for Social Research. In other words, we might be spending $240 billion to get people to save $2.4 billion more.
But don't the trillions of dollars in 401(k) accounts tell a different story? Not necessarily. There isn't enough data for the U.S....
Households save where the subsidy is, but don't save more because of the subsidy. It turns out the best way to get households to save more is ... to make them save more. In other words, automatically take a percentage of each person's paycheck and put it in a retirement account, as a default" Article
Time then mentioned the study 24 hours later. All of these publications within a 24-hour period are just a coincidence, mind you. The article led with the headline: "Fiscal Cliff: Why Congress Might Have to Mess with the 401(k)". The essay follows along the same slant used in the other two publications:
"One of the earliest fears about tax-favored savings accounts like IRAs and 401(k) plans was that when this pool of savings grew large enough Congress would not be able to resist tapping it to help solve the nation’s debt problems. We’re about to find out if those fears—persistent for decades—have been justified.
Everything including the sacred mortgage deduction is on the table as lawmakers wrestle with the fiscal cliff, a year-end avalanche of scheduled spending cuts and tax increases. With a combined $10 trillion sitting in IRAs and 401(k) plans, retirement accounts make a juicy target. Some of this money has never been taxed, and under current law never will be.
To maintain this savings incentive the government “spends” $100 billion a year in the form of tax breaks to those who stash money in these kinds of accounts. Now, a new study suggests this tax incentive does little to change saving behavior. Some lawmakers, no doubt, are wondering: Why keep an expensive tax incentive that does not incent?.." Article
Keep in mind this website reported four years ago the efforts of Professor Theresa Ghilarducci to convert all 401K accounts to Government Retirement Accounts that were defined benefit plans that guaranteed a 3% annual return. Earlier post. Another earlier post: Are the Democrats planning to seize your 401K plan?>
These articles and study merely advocate, um, examine the idea of abolishing the 401K tax break. The good professor advocates converting them to government-held retirement accounts. What will happen? Stay tuned. There is a reason this suddenly appeared in the media this week.