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Tax reform options: promoting retirement security
1Employee Benefit Research Institute, Washington, DC 20005-4051, USA.
EBRI Issue Brief
|February 15, 2012
Summary
Proposed changes to retirement savings tax policy could significantly reduce 401(k) accounts. Ending tax deductions or imposing a "20/20 cap" disproportionately impacts lower-income workers and younger generations.
Area of Science:
- Retirement savings policy
- Taxation
- Economics
Background:
- Current tax code caps defined contribution plan contributions.
- Federal deficit reduction efforts prompt reviews of tax expenditures.
- Two major reform proposals aim to alter retirement savings tax policy.
Purpose of the Study:
- Analyze the impact of proposed changes to retirement savings tax incentives.
- Evaluate the effects of ending tax deductions for 401(k) contributions.
- Assess the consequences of the proposed "20/20 cap" on retirement savings.
Main Methods:
- Simulation of tax policy changes on 401(k) account balances.
- Analysis of proposed "20/20 cap" impact across income groups and age cohorts.
- Examination of the role of employer-sponsored retirement plans and auto-enrollment.
Main Results:
- Ending tax exclusion for employee contributions could reduce 401(k) accounts by 11.2% to 24.2% at retirement age.
- The "20/20 cap" significantly reduces retirement savings for low-income workers and younger cohorts.
- Employer-sponsored plans and auto-enrollment are crucial for retirement income security.
Conclusions:
- Proposed tax reforms may lead to substantial reductions in retirement savings, particularly for vulnerable populations.
- The "20/20 cap" could disproportionately harm low-income workers and younger individuals.
- Careful analysis is needed to understand the full impact of changing retirement savings tax incentives on future retirement income adequacy.
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