The things those candidates say.
Last summer, during the presidential campaign – it seems so distant now, thankfully – the Biden team floated a meatball of a proposal to end the 401(k) tax break. Troublemakers, wags and retirement planners, pondering a win by old Joe, wondered if the Oval Office might need fitting out with a rubber lining.
The 401(k) is a solid foundation of retirement planning for Americans. Granted, only 32% of us have money in one – odd, since 59% of the populace are eligible. Clearly, we need to talk. Whatever bouts of madness are current, undeniably, the 401(k) is important and valued – indispensable – to many. Messing about with its innards would be nervy, worrisome, politically suspect. Remember those midterm elections, Mr. President? Right around that corner; tread easy.
Oh, take it easy, I can hear you saying – he just wouldn’t dare. Fine tuning, though – would that be so wrong? If explained patiently and consistently – two areas where Washington has lost its touch, alas – it might be possible, even positive. Yet anything so ingrained and depended upon may only be modified with delicacy – another area where Washington… oh, you know it as well as I.
Let’s examine the proposal of the candidate, now president. A big caveat (comforting or fearsome, depending on temperament): President Biden hasn’t uttered a word yet on our topic. No suggestions, indications or, crucially, big numbers. Right now, it’s all speculation, making this a fine time to – no, not to ignore the problem in favor of more pressing matters – but to prepare.
Keep an eye peeled, an ear to the iron rail. I’ve talked about contacting Congress, petitioning your representatives, getting involved by joining an advocacy group. Here’s a good issue, and Washington historically listens when people talk retirement. Take the opportunity to learn and then speak before we’re faced with a nation-shaking commotion.
OK, where were those facts tangentially mentioned? You will not be shocked to hear these vary, depending on who’s speaking. Fearful critics – I greet him in my mirror daily – say that candidate Biden advocated eliminating the deductibility of contributions to 401(k)s – and IRAs and similar accounts – and replacing them with matching refundable credits on citizen-taxpayer’s returns. Let’s look at the candidate’s website:
“Under current law, the tax code affords workers over $200 billion each year for various retirement benefits – including saving in 401(k)-type plans or IRAs. While these benefits help workers reach their retirement goals, many are poorly designed to help low- and middle-income savers – about two-thirds of the benefit goes to the wealthiest 20% of families.”
The website hosting this statement is still asking for contributions to “make Donald Trump a one term President.” I note only that ‘one term’ should be hyphenated in this context and ‘president’ shouldn’t be capitalized. Then again, I’m no politician.
Quote on: “The Biden Plan will make these savings more equal so that middle class families can enter retirement with enough savings… President Biden will do so by: Equalizing the tax benefits of defined contribution plans.” Well, you can read the rest yourself, if you need. Mr. Biden doesn’t like tax deferral – this reminds me of Margaret Thatcher, who famously ‘didn’t like trains’ – she gutted British Rail, and the Brits still enjoy traffic jams monumental, her legacy and fair warning – or not.
The contributions of investors in 401(k)s and similar are tax-free, as is the growth of these accounts. Taxes are paid in retirement when the money is withdrawn – usually advantageous, as retiring generally shifts one into a lower tax bracket. Biden seems unhappy that higher-income families got a bigger tax break than we commoner mortals. Other people’s joy never bothers me, yet I appreciate his solicitude.
Biden’s plan, such as it is – without timeline, comprehensive figures or legislative schedule – calls for a tax credit of 26% of the contribution amount paid into a retirement plan, no matter one’s earnings bracket. That’s the only number we have as yet – it comes from the Tax Foundation, a reasonably independent source. I understand this would be “revenue neutral”: the government wouldn’t gain or lose tax revenue, but the tax benefits would be the same for those wealthy and otherwise. This much – not much – we appear to know.
A critic says Biden’s idea would entice wealthy taxpayers to switch to Roth accounts, where one contributes after-tax dollars – that means you withdraw funds in retirement tax-free. There’s always a way, legal and clear, to maneuver.
I wonder if the Feds would mind. Tax increases on the wealthy are under consideration – we know this with clarity. If they tax more from earnings today, perhaps they won’t mind not getting it later. Nothing is stopping average earners from employing this strategy, either. Despite promises not to hike middle-class taxes, there’ve been hints and suggestions that the Democrats might try it – perhaps it’s best not to test them.
If the wealthy withdraw from 401(k) usage, and if they’re business owners, it could potentially hurt their employees – so runs one argument. Employers who own 401(k)s under law must offer the plan to employees. If they drop out themselves, they might limit the plans or cut them altogether, runs this concern. This is certainly a matter to contemplate, and I hope legislators will ruminate carefully before moving on any such reform.
I force myself to ask for us: what reform is this, again? It’s all so vague and hard to argue in a cogent fashion. Cautious supporters can be found, suggesting a tax credit on funds contributed to retirement plans would put real, hard cash in the hands of lower-income workers, which in turn they could invest in retirement. It’s a nice argument. Biden’s proposal, if that’s what it is, directly incentivizes retirement savings today, concretely, right in the bank. When they put it this way, I can see it their way.
Do we need a prediction? The whole issue is cloudy, a low-agenda item. Citizens would fear it; the retirement industry would fight it; today’s system of defined-contribution plans may be too complex to alter, beyond helpful tweaks. I don’t know; I never underestimate the penchant of humans to overturn sound apple carts. Yet sometimes, we let sleeping dogs lie. If I had to Vegas it – and you may say I’m a dreamer – I’m all-in on that last proposition.