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News from, July 27, 2011
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Will DC plans become budget battle pawns?

The Obama administration and Congress are currently wrestling with budget deficits exceeding $1 trillion and a debt ceiling way north of $10 trillion. Approximately 1/3 of federal spending is reportedly financed by borrowing rather than tax revenues. According to the congressional Joint Committee on Taxation, policy decisions in the form of tax deductions and other breaks, known as "tax expenditures,” reduce federal tax revenue by about $1.1 trillion a year. According to a blog by David Wray available on the website, the treatment of contributions to retirement savings plan is about 10% of the total and is among the largest of these so-called "expenditures.” 

The report of President’s Debt Commission has two scenarios for the combined limit on contributions to DC plans:  limit it to the lesser of $20,000 or 20% of compensation, or eliminate it altogether. The bipartisan so-called "Group of Six” senators were, until recently, trying to convert the commission’s recommendations into bipartisan debt reduction legislation. As the blog puts it, this all paints a "big bulls-eye” on the employer-sponsored DC plans. It also suggests that this summer’s efforts are just a prelude to a bigger "barroom brawl” in 2013 that may turn into a situation "where virtually everyone will be willing to throw the employer-sponsored defined contribution system under the bus.” The blog notes that some see the current situation as an opportunity to replace the current system with a government-run program or replace the current deferral system with a refundable tax credit. On the other side of the political spectrum are those who reject any tax preference as inappropriate. In the face of this burgeoning pressure, the blog advocates preparation now to preserve the private retirement plan system in "anything resembling its current form.”

This discussion is already occurring on Capitol Hill. In recent testimony before the House Subcommittee on Health, Employment, Labor and Pensions, the president of the American Benefits Council noted that the tax expenditure for employer-provided retirement plans may prove tempting to those looking to reduce the federal deficit. He warned that this would overlook how these plans "provide retirement savings incentives to workers at a significantly lower cost than the additional dollars needed to expand corresponding public programs.” He urged committee members to be "a voice” for tax policies that "support, not erode, employer plans and retirement savings.” An earlier ASPPA analysis showed that the real cost of retirement of savings incentives is 55 to 75% lower than the amounts claimed by "budget hawks,” meaning that proposed cuts would not save nearly as much as predicted while jeopardizing the future of 401(k) and other retirement plans. This is primarily because workers primarily withdraw money from the plans only at retirement, the resulting taxes fall outside the 10-year timeframe used in the cash-flow analysis by budget evaluators. As a result, this tax expenditure is "scored” as "lost revenue, rather than deferred revenue.” According to ASPPA’s CEO, reduction of the incentives for workers to save through these plans "will send millions of low- to moderate-income workers into retirement with little savings.”

Reprinted with permission from
401(k) Advisor

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