The debate over averting financial consequences in early 2013 has refocused attention on concerns that the coveted 40(k) plan and IRAs — long considered the last bastions of private retirement savings for most working Americans — may be tapped.
The plans may be slated for dramatic changes, including limited deductions, retroactive taxation and, possibly, a nationalization scheme to impose government-mandated plans on employers, with savings allocated exclusively to Treasury bonds.
An Investment Company Institute study published last month said U.S. retirement assets at the end of the second quarter of 2012 totalled $18.5 trillion, including $3.5 trillion in IRAs and $5.1 trillion in 401(k) plans.
These present very tempting deficit-funding sources for the Obama administration as it faces a budget deficit approaching $20 trillion.
By restricting deductions for the highest wage earners or, as some reports have suggested, retroactively taking back already deducted amounts, plan assets could be reduced and resources effectively transferred through taxation back to government coffers to help pay down government debt.
In response to this threat, the American Society of Pension Professionals and Actuaries (ASPPA) has launched a national campaign known as “Save Our 401(k)s” which is part public lobbying effort and part public education effort.
Brian Graff, executive director and CEO of the ASPPA, criticized President Obama’s proposal to limit the tax benefit for retirement savings for families earning more than $250,000 and categorized it as “a bad proposal based on bad math.”
Graff went on to say, “The tax break for retirement savings is a deferral, not a permanent write-off. Under the president’s budget, these taxpayers wouldn’t just lose a current tax break, they would actually be penalized for saving – paying taxes now and taxes later.”
Another organization, the Insured Retirement Institute (IRI), said that while the administration’s proposal “does not explicitly call for changes in the tax status of annuities for all,” there are serious concerns, “including the elimination of certain tax incentives for retirement savings and new limitations on deductions for retirement contributions.”
IRI is urging policy makers “to protect incentives in place for Americans to attain financial security in retirement, particularly by maintaining the tax-deferred status of annuities for everyone.”
Another concern is an idea endorsed in the Obama administration’s 256 -page budget for fiscal 2013 mandating employers offer an “Automatic IRA.”
Employers would be directed to allocate an amount that equals 3 percent of a participating employee’s salary into a Social Security-type retirement plan that invests in U.S. treasuries, with a return of 3 percent guaranteed by the federal government.
Even though tax credits would be provided to businesses under this scheme, the concern is that this would add an additional cost burden on small businesses that would restrict job growth.
With nearly half of 78 million workers in the United State without work-based retirement plans, a drive to equalize access to retirement assets funded by employers is now a distinct possibility for the coming year.
With the uncertainty of the outcome of negotiations in coming weeks and with a vulnerable economy, the idea of government control over private retirement funds could fundamentally change how Americans save for retirement, and this is unsettling for many savers and retirees.