Last week I wrote about the book release of Retirement on the Rocks by Professor Christian Weller. In addition to being an economics professor at UMass-Boston, Weller is also a senior fellow at the Center for American Progress. In October 2015, CAP released a report that he co-authored with Teresa Ghilarducci, the director of the Schwartz Center for Economic Policy Analysis at the New School. Their report examines the inefficiencies of existing retirement savings incentives.
Weller and Ghilarducci found that the retirement savings incentives built into the tax code are inefficient and poorly targeted. Most often they help the people who need the least help, while doing little for low-income workers, who struggle to save for retirement. The existing savings incentives are also needlessly complex. In order to maximize the tax benefits of these incentives, individuals saving for retirement must understand complicated rules that prioritize some types of savings over others.
The existing savings incentives are also far too dependent on employer-sponsored retirement savings plans. Many Americans do not work for an employer that offers a retirement plan. For those who do have a retirement plan through their employer, it is often an inadequate defined contribution 401(k) plan. Unfortunately, savings incentives are structured to prioritize contributions to 401(k) accounts rather than contributions individuals make to Individual Retirement Accounts (IRAs). Because the savings incentives are connected to employment, they also benefit high-income workers more than middle- or low-income workers. High salaried workers have more to contribute to their retirement savings, but they also enjoy much greater tax savings because the incentives reduce taxable income.
The existing savings incentives also create a huge loss of revenue for federal and state governments. This might be worthwhile if these governments were accomplishing their goal of promoting adequate retirement savings, but they are not. Many Americans face a looming retirement crisis and the existing savings incentives are not helping them save adequately. Policymakers must ask themselves if it is worth the millions of dollars they lose in tax revenue to help people who can already afford to save for retirement.
Of course, we are in this situation in the first place because of the decline in defined benefit pensions. As many employers in the private sector have abandoned defined benefit pensions in favor of defined contribution 401(k) plans, Americans have struggled to save enough for retirement. Incentivizing savings is an admirable goal, but the existing incentives are poorly targeted and do little to promote savings among people who need it the most. Reforming these savings incentives in the tax code should be part of any plan to increase retirement security for all Americans.