Messing With 401ks is a Bad Idea

In ancient Rome, legislators would determine policy issues by sacrificing an animal and then employing a priest to interpret the signs based on the animal’s entrails. 

While our Capitol Hill legislators don’t engage in animal sacrifices, they’ve retained their priest-interpreters:  the Congressional Budget Office.  The result:  some House Republicans are proposing limiting 401(k) retirement savings to appease the CBO high priests.

For decades, we’ve heard how Americans aren’t saving enough for retirement, but the reality is that many are, through their 401(k) plans.  And it often includes matching funding by their employers.

The 401(k) program was enacted by Congress in 1978 (during the Carter Administration) as an amendment to the IRS regulations.  For some readers, the 401(k) program has existed for their entire lifetimes.

Currently it is an opt-out program; new employees are automatically enrolled unless they opt out.  It also has rules about “highly compensated employees” (who earn more than $120,000 annually in gross income) to ensure that lower-compensated employees are not disadvantaged.

How the IRS does this is very technical, but it results in an annual tax-deferred limit of $18,000 for people under 50, and $24,000 for those age 50 and over.

Under the present system, savers pay taxes when they withdraw their money from their accounts, at an expected lower income tax rate.  That’s because seniors generally have less income (and a lower income tax bracket) when compared to their working years.

Now, in order to pay for tax cuts elsewhere, some House members have proposed slashing the dollar limit on what can be saved in a 401(k) plan.  It whittles the 401(k) limit down to a mere $2,400 per year for everybody.

Others have proposed keeping the $2,400 limit for tax-deferred contributions, while converting the remaining amounts into Roth-style savings instruments – whereby the saver pays (probably higher) taxes today on each dollar he or she currently contributes to their 401(k) plan.

Are you confused?  You should be.

Would these proposed changes result in Americans saving less for retirement?  I’d take that bet.

And it’s all thanks to those House Republicans who want to take a straightforward retirement system (which includes profit sharing!) and mangle it into a complicated tiered system.  This is a great example of how the membership, and House leadership in particular, is out of touch with what Americans need.

Cutting corporate taxes might or might not improve the economy.  Encouraging the use of 401(k) accounts is a 100 percent sure thing to help people save for retirement.  Plus, those savings inject a tremendous amount of capital into our market system.

According to the Investment Company Institute, Americans have saved $5.1 trillion in 401(k) assets as of June 2017.  Further, the plans account for 19 percent of U.S. retirement assets.

A hint to certain Republicans and moderate Democrats in states with employees who manage 401(k) plans (Delaware, Pennsylvania, and others):  get angry.  Don’t put your constituents’ jobs at risk by shrinking 401(k) accounts into 201(k)’s.

Incidentally, President Trump will be on your side.  On October 23 he tweeted:

There will be no change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!

Clearly, President Trump not bowing down to the CBO high priests and he’s much more in touch with the middle class than many House Republicans.

Twice before we’ve been through this hell of Republican bad ideas for seniors:  privatizing Social Security accounts and Medicare vouchers that magically shrink.  Now comes a fresh hell on 401(k) plans.  When will we learn that targeting seniors and would-be seniors (everybody else) is a lousy idea?

To borrow an image from William F. Buckley, President Trump is standing athwart these lousy ideas and saying: Stop!  Or, in his New York lingo:  Enough already!

This article first appeared in The Daily Caller

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About the Contributor

Joanne Butler

Joanne Butler

Joanne Butler of Wilmington is a graduate of the Kennedy School of Government at Harvard University and a former professional staff member of the Ways and Means Committee of the U.S. House of Representatives.

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