Congress Mulls Tax Reforms to Spur Retirement Savings

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The House Ways and Means Committee held a hearing Tuesday on tax reform and tax-favored retirement accounts as it sought to find ways to use tax policy to encourage more Americans to save for retirement.

One of the topics of discussion was a bill introduced by Rep. Richard Neal, D-Mass., that would amend the Tax Code to allow companies to set up automatic IRA arrangements for employees in which contributions would be automatically deducted from their paychecks if they are not already covered by qualified retirement plans. The proposal has received support from the Obama administration, and several of the witnesses at the hearing gave the idea their support.

However, another purpose of the hearing was to find ways to simplify the various retirement arrangements already available in the Tax Code.

“The proliferation of tax-favored retirement accounts has occurred as specific needs have led Congress to create new types of plans with different rules,” said Ways and Means chairman Dave Camp, R-Mich., in his opening statement. “Some, however, have questioned whether the large number of plans with different rules and eligibility criteria leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings. In addition, many commentators have offered ideas for increasing participation in retirement plans and better targeting the incentives. These ideas range from simplification and consolidation of existing plans and accounts, to changing the default rules governing whether an employee participates, to additional incentives such as the Saver’s Credit.”

The committee also looked at the tax incentives for retirement savings in the overall context of the tax reform proposals it has been considering.

“What should be clear is that the basic structure of our current system should be preserved, and that this structure should not be repealed to pay for tax reform,” said ranking member Sander Levin, D-Mich. “Tax reform should approach retirement savings incentives with an eye toward strengthening our current system and expanding participation, not as an opportunity to find revenue.”

Jack VanDerhei, research director at the Employee Benefit Research Institute, noted that automatic enrollment provisions in 401(k) plans had caused more low-income employees to save for retirement. However, they remain at great risk of having insufficient retirement income, especially as more workers are forced to rely on their 401(k) accounts for their retirement savings.

Judy Miller, chief of actuarial issues and director of retirement policy at the American Society of Pension Professionals and Actuaries, said she supported the auto-IRA proposal sponsored by Neal. However, she cautioned against dramatic changes in the retirement system.

“The current system is working very well for millions of working Americans,” she said in her prepared testimony. “Expanding availability of workplace savings is the key to improving retirement security. There is no need for dramatic changes, but measures should definitely be considered to make it easier for employers, particularly small businesses, to offer a workplace savings plan to their employees.”

David John, a senior research fellow at the Heritage Foundation, also expressed support for the auto-IRA proposal, along with account simplification. “In 2006, a bipartisan majority in Congress eliminated barriers to the use of automatic enrollment and similar automatic techniques in retirement savings plans with the result that millions more Americans are both saving and building retirement security,” he said. “The results have been stunningly good. With automatic features, enrollment in 401(k)-type accounts has grown to average over 80 percent of eligible employees. In addition, every major income, age, racial or ethnic, and gender has shown an increase in participation rates. However, the job is not complete.” He noted that studies show that only about 5 to 10 percent of workers who have access to a non-payroll deduction IRA actually have such an account and make regular contributions to it.

John added that the automatic IRA proposal would provide a relatively simple, cost-effective way for the 75 million Americans working for employers that do not offer a retirement plan a way to save for retirement. “Many of these workers are part-time employees of smaller businesses, women, members of minority groups, or all three. The Automatic IRA would enable these employees to save for retirement by allowing them to regularly transfer amounts from their paycheck to an IRA,” he said.

Randy Hardock, a partner in the law firm Davis & Harman LLP, testified on behalf of the American Benefits Council. He warned against making dramatic changes in the rules and incentives governing retirement plans and cautioned that they could lead to “perilous and unintended consequences.” He also worried about making such changes in the context of tax reform.

“Too often, retirement policy is driven by extraneous considerations, such as the need to generate revenue for the federal government,” he said. “When these revenue considerations are at the forefront, the result has often been unnecessary complexity and cost, or worse yet, direct harm to Americans’ retirement prospects. Proposals that purport to increase short-term federal tax receipts by redirecting, eliminating, or eroding the existing retirement savings incentives achieve those additional taxes largely because individuals are saving less for retirement. Making matters worse, any short-term revenue gain that might be derived from changes in the retirement savings incentives is largely illusory because when a worker saves less money today it will mean smaller distributions (and less tax revenue) when the individual retires. That is a lose/lose situation for the retiree and the government.”

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