On October 18, SCEPA and The Economic Policy Institute (EPI) joined on Capitol Hill to present a briefing titled, “Federal Budgeting for Retirement Security: Examining Tax Expenditures for 401(k)s and Other Retirement Plans.” The event brought together a bipartisan panel of experts on the issue of tax expenditures and attracted a crowd of congressional staff, economists, advocates, and members of the press.

The event documented the limitations and costs of tax expenditures for private pension funds and presented responsible budgetary reforms for consideration by President Obama’s National Commission on Fiscal Responsibility and Reform.

The panel included three presentations.

David Walker, founder and CEO of the Comeback America Initiative (CAI) and former U.S. Comptroller General, discussed the need to re-examine tax expenditures in the federal budget.

Link to presentation: The Importance of Examining Tax Expenditures in Federal Budget Analysis

Eric Toder, fellow at The Urban Institute, presented his research showing that current retirement tax expenditures largely benefit higher-income individuals.

Link to presentation: Who Benefits from Retirement Savings Incentives

Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis (SCEPA) at The New School, discussed her reform proposal for guaranteed retirement accounts to provide for both universal coverage and economic growth.

Link to presentation: Pension Reform: Rethinking the 401(k) Subsidy

“As President Obama’s National Commission on Fiscal Responsibility and Reform approaches its December 1st report deadline, now is the right time for Congress to review tax expenditures,” said moderator Lawrence Mishel, President of the Economic Policy Institute.  “With this discussion, we take our case directly to the Commission and to Congress, to urge them to consider reforming retirement tax expenditures to create a more efficient, effective and just federal budget.”

A long-term plan for fiscal health requires every dollar of spending be effective, efficient, and fair. However, the federal budget includes approximately $1 trillion on tax expenditures in a year- around 6% of GDP- that is not scrutinized as part of the annual appropriations process.  This has allowed tax expenditures for retirement savings to persist, despite evidence that they are expensive, ineffective, and regressive.

“We have to reexamine our entire tax system to make it make it more simplified, more accessible, more equitable, and so that we can keep the promises we’ve made,” said Walker.  “In order to make this happen, we need to a take a hard look at tax expenditures.  Sometimes they work, sometimes they do not, but when they’re effective, too many of them favor the well off.”

Federal tax expenditures support retirement savings with foregone revenues amounting to over $143 billion each year. The top four categories in retirement expenditures (employer plans, 401(k), IRA, and Keogh plans) rank within the top 20 expenditure allocations of the budget—above child credits, education credits, and the Earned Income Tax Credit (EITC). The cumulative effect places tax expenditures for retirement second only to employer exclusions for medical care on the rankings of total outlays.

Rather than increasing retirement plan coverage and savings rates, most of these subsidies go to high earners who already have adequate retirement savings and can simply shift savings to tax-favored accounts. A 2005 GAO report cites research showing that no more than 9% of savings under the IRA tax expenditure are new savings engendered by the program. Taxpayers in the highest-earning 20% claim nearly 80% of the total benefits of entitlement programs for retirement accounts. More than 40% goes to the top 6% of taxpayers alone.

“An improved retirement system should be built on three main principles: it must cover everyone, it must allow workers to carry accumulated benefits from one employer to another, and it must ensure that workers’ hard-earned money is being invested effectively,” said Ghilarducci.  “The Guaranteed Retirement Account SCEPA has developed with EPI is the only system I’m aware of that meets these three objectives.”

The GRA Plan would ensure that every worker has an adequate and guaranteed pension for life, while helping to raise Americans’ savings rates. It would eliminate many of the risks Americans now face in planning for retirement, including the risk of losing pension coverage, retiring during a market downturn, or outliving one’s savings.