There will be much debate in the days ahead about the “super” committee’s inability to reach consensus on efforts to cut our national spending habits in the coming years. While those deficit-cutting discussions have been going on over the past few months, there have also been two major reform proposals that have surfaced which would drastically change, for the worse, current tax policy concerning retirement savings.
First, a plan was recently presented to the Senate Finance Committee which, if adopted, would end the existing tax deductions for 401(k) and 403(b) contributions and replace them with a flat-rate refundable tax credit which would serve as a matching contribution into a retirement savings account. According to a retirement industry research group, this proposal would reduce projected retirement account balances by up to 24%.
The second proposal calls for a “20/20 cap.” This cap, if adopted, would limit individual annual contributions to either $20,000 or 20% of income. Under current law, contributions are capped at the lesser of $49,000 per year or 100% of a worker’s compensation with certain exceptions applying. The “20/20 cap” would be a drastic reduction for many workers.
Of course, these proposals are being placed on the table in an effort to lower the federal deficit and reduce federal “tax expenditures.” However, in reality, if workers cannot build retirement accounts that become taxable upon distribution (with an exception for ministers), more pressure will be placed on the Social Security system to care for these workers in their later years.
Regardless of political party affiliation, all of us are concerned about our national debt that has now surpassed $15 trillion. However, in getting the annual deficit under control and in an effort to start paying down the national debt, we cannot shift the burden to a social system that is already crumbling under its own problems.
You can be assured that we will continue to carefully monitor these legislative efforts as they make their way through the congressional process.