Fiscal Cliff: Why Congress Might Have to Mess with the 401(k)

Everything is on the table as Congress wrestles with the fiscal cliff, heightening long-held fears about the tax-free and tax-deferred growth embedded in retirement accounts.

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JIM LO SCALZO / EPA

Democratic Senate Majority Leader from Nevada Harry Reid speaks to the media on the impending fiscal cliff in the U.S. Capitol in Washington, D.C., on Nov. 27, 2012.

One of the earliest fears about tax-favored savings accounts like IRAs and 401(k) plans was that when this pool of savings grew large enough Congress would not be able to resist tapping it to help solve the nation’s debt problems. We’re about to find out if those fears—persistent for decades—have been justified.

Everything including the sacred mortgage deduction is on the table as lawmakers wrestle with the fiscal cliff, a year-end avalanche of scheduled spending cuts and tax increases. With a combined $10 trillion sitting in IRAs and 401(k) plans, retirement accounts make a juicy target. Some of this money has never been taxed, and under current law never will be.

To maintain this savings incentive the government “spends” $100 billion a year in the form of tax breaks to those who stash money in these kinds of accounts. Now, a new study suggests this tax incentive does little to change saving behavior. Some lawmakers, no doubt, are wondering: Why keep an expensive tax incentive that does not incent?

(MORE: Why the Fiscal Cliff Is the Wrong Thing to Worry About)

The study, reported in The New York Times, comes from Raj Chetty and John N. Friedman of Harvard, Soren Leth-Petersen and Tore Olsen of the University of Copenhagen, and Torben Heien Nielsen of the Danish National Center for Social Research. It looked at data from Denmark, where the pension system is similar to that in the U.S., and found that every dollar that government spent on tax breaks increased total savings by about one penny.

That’s not much of a payoff. Meanwhile, the Tax Policy Center in Washington has found that about 80% of retirement savings benefits flow to the top 20% of earners. Eliminating the deduction for retirement savings would hit the well-off disproportionately, a condition with a lot of appeal in the current political climate.

Trying to head off this line of thinking, the American Society of Pension Professionals & Actuaries recently launched a save-my-401(k) campaign, encouraging workers to email their representatives in congress. The group notes that having a 401(k) plan is the single most important factor in determining if a worker is saving for retirement and that families with a retirement savings account, on average, have two-thirds of their assets in that account.

Yet the Danish study suggests that little would change if the tax incentives were removed. Only 15% of savers actively respond to tax incentives, the study found. Far more important are features like automatic enrollment and contribution rates that automatically increase with pay raises.

(MORE: Wall Street’s Bet on the Fiscal Cliff)

So hold on to your wallet. Congress has many options when it comes to tapping this vast reservoir. It could eliminate the deduction altogether or just for top earners, further restrict the amount that is deductible (currently $17,500; for those over 50, $23,000), start taxing retirement savings growth, or take back the part that has grown tax-free.

In the throes of a retirement savings crisis, none of these options is appealing. But that last one is most troublesome. At stake is any savings that has accrued tax-free in a Roth IRA. Tax-deferred growth could be a target too if you find yourself in a lower tax bracket in retirement. There is no discernible momentum behind such measures. But a retroactive tax on this sheltered income has been a worry from the start. And now these accounts have a meaningful total—and everything is on the table.

145 comments
brokyungmo
brokyungmo

It's sad that we have a system of government controlled by the monetary system that believes in taxing only income earners, because they believe taxing capitalists will have a negative impact on the economy.


Well...   that last I remember, the consumer base supported the economy. Not our tax exempt banks and their owners. 


Robbing income earners of all their wages may be easier on the pockets of capitalists that own our banks, but to what extent? There is a point at which the revolution will come abruptly and topple this ponzi scheme and money will become meaningless and the populous with start using the wealthy for their meat. 

StacyLanders
StacyLanders

401k Never been taxed. Well, it might have been pre tax money when placed in the IRA. BUT, IT IS GOING TO BE TAXED WHEN IT COMES OUT OF THE IRA!  IT WILL BE TAXED AT ORDINARY RATES. It is not exempt from any tax. 

fburr12909
fburr12909

Should this happen, prominent left-wing politicians will start dying of lead poisoning!

SteveHall1
SteveHall1

I think we should divide the Union into Red and Blue States.  Let the Blue States have the bankrupt northeast and California and leave the rest of us the Hell alone!

Thinkaboutit
Thinkaboutit

The government cannot "spend" money that never was theirs; therefore, to say that tax breaks involve "spending" government money is ludicrous. But the author is right that Congress cannot keep its hands off any money it can possibly grab. We don't have a problem with not taxing enough. We have a problem with SPENDING.

Kudos, also, to TIME for falling into Harry Reid's trap -- he tempts the gullible with improbable fears to distract them from the high crimes that are being perpetrated in the "fiscal cliff discussions" in Washington.

SteveHall1
SteveHall1

This has to be the most stupid article I have ever read.  Obviously more liberal bias quoting the experts from Harvard and Denmark?  Simple answer, just stop spending so freaking much, dumb asses! 

dstegemoller12
dstegemoller12

Come and get it you blood sucking socialists, all of my investments have been converted to lead, I'll give it to you FAST!

Jllongindy
Jllongindy

Were the government to take our 401/IRA investment/savings and replace them with government bonds, what would happen to stock market? The market would crash. This could be something Obama and other socialists want. Destroy the capitalists! Now I agree with this if we are talking investment banks/bankers.

As we baby boomers retire and liquidate our investments/savings there will also be a huge negative for the financial markets. There are not enough new workers and jobs for them to replace our generation and our saving/investing with regard to the financial markets. Even if we had a prosperous economy. 

Another issue would be that any funds that you did not draw in monthly payments during retirement would end with your death like Social Security. Your savings/investments would not be passed on to your survivors. 

The initial actuarial study for Social Security planned on more people paying than receiving Social Security. The numbers were never updated to address longer lifespans. Major changes in the population numbers have never been addressed. On top of everything else, new benefit groups have been added to the Social Security program such as SSD, SSI and imigrants.

We have about one and one half people paying taxes so that one person can receive some form of benefit. The numbers are not sustainable.

All of these things are coming home to roost. There are not of resources available to maintain the status quo. I don't see anything that will resolve these problems.

guittadabe
guittadabe

Time is working hand in globe with Obama as usual.  Their point is:

a) show that 401K's really are not a good incentive to save - they trot out this Swedish study that doesn't even pass the smell test - the "cost" to the government in deferred taxes is only to the extent that people actually use the 401K.  If people are not saving in a 401K, it wouldn't cost the government a thing.  Yet, the Swedish "study" shows that the government is "spending" on 401K, but people are still not saving!  If this is not BS, nothing is.

b) taking away the 401K will hurt the rich the most.  Hey, this divide and conquer strategy has worked - Obama's re-election strategy depended totally on it, and he won!  He was able to convince the poor and the middle class that only the rich will pay for the government living beyond its means, and that there will be no pain for them.  He's not going to raise much money from the rich who will just not engage in activities that show income.  Those activities though benefit the poor and the middle class, and there will be more poor as a result.  This works out well for Obama as there will be enough poor for the Democrats to then tell the poor that there are enough of them to attack not just the rich, but the middle class - take away their 401K's!  You don't have 401K's!  The money that is in the 401K's of the middle class and the rich used to be with the poor - they stole it from you! To all the middle class people out there, congratulations - you just voted to lose the country for everybody.  This wouldn't be unprecedented.  The Socialist administration of Argentina recently TOOK OVER the retirement accounts of their people.

Congratulation Time magazine on this nice trial balloon.  This article was disgusting!

GWashingtonInde
GWashingtonInde

A neglected aspect of this debate is that 401K's developed as an alternative to fixed pensions for income support in retirement. 401K's have reduced pension liability for both private sector & gov'tal employers. As a 50-something baby boomer, I think my situation is typical: at age 65, I expect to rely on my 401K annual minimum required distribution & social security.  If 401K contributions are taxed or taken over by the federal gov't to be managed for "our good" many baby boomers will be forced to respond by working longer, further exacerbating the shortage of jobs for younger workers.  I work in a profession with co-workers still productive in their late 70's & 80's - not a choice I favor - but that is a work pattern that will become more common in the workplace out of necessity if 401K's are altered as a personalized pension plan.  

RWCook
RWCook

We let them steal our ability to manage our own health. We let them continue to limit our ability to defend ourselves. We let them attack our religious freedoms. Will people finally say 'enough!" when they come to steal your life savings?

cpae18
cpae18

The thing that bothers me the MOST... and is the scariest concept of the whole thing is the concept that the Government 'spends' the money on tax 'breaks'.   It implies that the Government is entitled to the money in the first place and it is 'giving it back to you' by not taxing you.   I'm astonished at how many people buy into this.

ThomasPaine1
ThomasPaine1

Taxes ARE paid on IRA's, as you withdraw savings. This is nothing more than an attempt to steal money.

songwriterz
songwriterz

The 53% have spoken: they want the government to give them stuff and they don't care how the government gets it or from where it comes. The prez wants this! The Senate wants to keep kissing his arse! The House barely stayed under GOP control during the recent elections.  Do any of you actually, truly and truthfully think this can be stopped?!?!? If the government decided to rescind the tax exemption - and who can stop them, really - then they could instantly seize $2 trillion with the stroke of a pen! Do you really think this ISN'T gonna happen? Wake up and smell the unwashed hippies who run DC now.

Hadrewsky
Hadrewsky

Question:

If congress nuked the 401k would things get better?

Fiscal Cliff = Bad

Poor  Old People = Bad

This situation = Bad

I really cant touch this one with a prediction.

iowemysoul
iowemysoul

@porcelain10 @TIMEBusiness @Pudingtane This is Obama's next target - Someone needs to "balance" the deficits of the death spiral states.

andilinks
andilinks

Will Congress take your 401k in December or January? Interest rates will go up when they do it. @Jenevalynne #tcot #ocra #sgp #teaparty

nobamanation
nobamanation

You thieving SOB's in Congress and the White House try messing with my 401k and you'll see how fast this revolution starts!! I'm not one of the rich 1%'ers, I don't make more than $200k/year (far less) but I've been saving and investing since my 22nd birthday (I'm 51 now) and I'll tell you thieving SOB's in Washington DC that there's no way I'll tolerate in any fashion, you trying to RE-DISTRIBUTE what I worked my arse off for, to some welfare queen and you'll see how fast this revolution gets started. No way hard working American's of any WORKING economic class are going to stand for this. I know I sure as hell WILL NOT!!

JerryWilegus
JerryWilegus

With the Banker's already putting you over a barrel, paying your next to nothing. If you are able to have any kind of a saving account. I can remember savings accounts paying 5% to 8% or more on savings accounts. Now You lucky if they pay You 1% to 3% on the same account.

 Now the Government wants there turn to tighten the screws some more. Your too late the Banker's beat you to it years ago.

Unless You can STOP the Federal Reserve from printing up FIAT Currency, Devaluing the Dollar even more. It will all be pointless soon enough. And You will add more people to your FOOD STAMP VOTING BLOCK. 

KerrySchiess
KerrySchiess

"That’s not much of a payoff. Meanwhile, the Tax Policy Center in Washington has found that about 80% of retirement savings benefits flow to the top 20% of earners. Eliminating the deduction for retirement savings would hit the well-off disproportionately, a condition with a lot of appeal in the current political climate."

These same top 20% of earners are paying 94% of all the income taxes the Federal gov,t  collects according to the IRS.  Why would the bottom 50% of earners put money in 401k's or IRA's when they pay no income tax at all? The next 30% of earners who pay 6% of total income taxes receive 20% of the tax advantages of IRA's and 401k's leaving  them with a very small tax burden. 

JesseAaron
JesseAaron

Regardless of an individual employee's decision to save or not save for retirement, if you take away the tax deduction for 401(k) savings, Employers will have no reason to offer 401(k)s to their employees.  The reason why Employers take on Fiduciary Risk, the costs of legal compliance and the chance of lawsuit is that they save on the employer side of payroll taxes employers would otherwise have to pay if an employee took their current 401(k) contributions as income.  Employers largely make employer contributions to plans because the contributions cost less than what the government would take in taxes on that same pool of money.  Take away these incentives, and Employers have no reason to sponsor 401(k)s.  Therefore individual saving decisions are moot to the conversation, because you won't have a choice when your employer stops sponsoring your 401(k).

grog656
grog656

52% of Americans voted for this pile of puke so they can get what WE have earned all for doing nothing!  This rouge regime is raping hard working Americans and getting away with it.  Why haven't the democrats produced a budget in over 5 years? 

JeromeBarry
JeromeBarry

@fburr12909 Not just left, but right and center who use 'the present crisis' to seize my savings.  

JeromeBarry
JeromeBarry

@SteveHall1 It is easy to blame government when we have only ourselves to blame for electing them.

JesseAaron
JesseAaron

@andilinks Please explain the connection between interest rates rising and a 401(k) takeover?  Oh right, there is none. 

Hadrewsky
Hadrewsky

@nobamanation 

Who you gonna get to actually shoot the rifles?

Your Boy Soldiers dont exactly have much of a 401k at stake to die for your revolution.

imcarroll
imcarroll

@nobamanation  I am so with you on this.  They sit on their fat behinds and want what we have worked for years. What gives them the right.  No we hard working AMERICANS will not tolerate this. There will be a revolution for sure!!!!!

ThomasPaine1
ThomasPaine1

@JerryWilegus :

I"m in this barrel. I'm getting maybe 1.5 percent on my savings that I accumulated while working by living well below my means, and now the &#$*&^% liberals are planning to steal it all at once via the government's gun.  And, no, I don't have a million dollars in savings, FAR from it, but by God I worked for it unlike the puke liberals who now want to grab it because it's there!!

nobamanation
nobamanation

@JerryWilegus Try learning how banking actually works. The FED sets the interest rates, not the Banks. Don't like low interest rates on your savings account? TOSS THE FED!

nobamanation
nobamanation

@KerrySchiess So why should those of us who've planned, saved, and invested for ourselves pay for the bottom feeders? I'm not rich, I don't make $250k a year but I was smart enough at a young age to start putting money away for my retirement. Because of that, the Fed's now want to TAX what I have AWAY from ME and my FAMILY, to give to some bottom feeder welfare queen? What, to pay for more free Obamaphones? HELL NO! Keep your GD hands off our 401K's you thieving SOB's!

jgroves4ward2
jgroves4ward2

@grog656 Because they were trying to break the recession started by the GOP!  Seriously, do you have memory of goldfish?  Obama did not start the recession, Bush and his cronies did.  Damn.  Do you sell tin foil hats as well?

StacyLanders
StacyLanders

@JeromeBarry @fburr12909 Only leftists like Obama would harbor any such thought as they believe wongly that wealth comes from the government not from business and individuals engaging in trade.  State ownership is communism. We have a bunch of communists who do not know it yet.

geary
geary

@JesseAaron @andilinks You mean other than he need for additional revenue to pay the debt when (not if) interest rates rise? Nah, no connection there, dweeb!

Hadrewsky
Hadrewsky

@imcarroll @nobamanation 

Great... A Revolution of Baby Boomer Soldiers...

What a Joke:- Your parents fought on Iwo Jima and Omaha Beach and you gave us Woodstock

How long exactly would your revolution last before the Marijuana smoke stops you in a burnout session? 

KerrySchiess
KerrySchiess

@nobamanation . Sorry for the misunderstanding. I am not in favor of this plan at all. I was trying to point  out that it makes no sense for the 50% of people to use IRA's or  401K's  because they pay no income taxes. Time's omission of the data on who is paying the vast majority of taxes and using retirement accounts to lower their taxes  was intentional so as to tell a story of the evil rich who are getting tax breaks that low income earners don't get. Time is lobbying the economic illiterate in this country to help Obama spread more of our wealth. 

KayleighTatum
KayleighTatum

@nobamanation I agree with you, but it's not right for Congress to take anybody's 401K, whether they make $250,000 or not.  It's theft no matter how you look at it.

RWCook
RWCook

@jgroves4ward2 @grog656  this is a tired old liberal argument. Bush and the GOP's worst deficit was a little over $400 billion one year (2004). Obama has tripled that each of his four years. Now show us where this crazy a$$ spending has ever led to recovery? The last ideologically-driven economic dilettante with 2 years of HS math to try it had the "recession" last 10 years. (or was that all Hoover's fault?)

grog656
grog656

@jgroves4ward2; I would much rather put my tin foil hat on to enhance my goldfish memory than be a parrot, repeating what you have heard repeatedly and been told to repeat, such as yourself.  Stop blaming Bush!  This is Obama's economy.  This is Obama's mess.  Obama had 4 years to do something positive and the economy only got worse.  You really can't be that blind and stupid not to see the reality of Obama's policies.  You can't be, but then again, I could be wrong.

JesseAaron
JesseAaron

@geary @JesseAaron @andilinks That would be rising interest rates indirectly causing a takeover of 401(k)s, not a takeover of 401(k)s directly causing interest rates to rise.  You confuse correlation with causation, but feel free to try again smart ass.

Thinkaboutit
Thinkaboutit

Not all Baby Boomers are/were hippies. Apparently your generation hasn't cracked a history book. Have you ever heard of Microsoft? Apple? I'd be willing to bet that the computer you're using was produced by a company owned by one of those awful Baby Boomers. And do your math, while you're at it. Millions of Boomers were still in high school and junior high when Vietnam ended. (And actually, my dad fought in Japan and the Philippines and my brother in Vietnam, Cambodia, and Laos, earning a Purple Heart.) Wondering what you've done for your country lately.

ThomasPaine1
ThomasPaine1

@KerrySchiess @nobamanationWhat really burns me is that Time omits the fact that most of us who have 401K's and IRA's have them because we lived well below our means while working, so that we could live one step up from destitute when we could no longer work. Now the GD liberals want to seize ALL of our money to support the grasshoppers who fiddled during the sunshine times of their lives.

Hadrewsky
Hadrewsky

@KayleighTatum @nobamanation 

Indeed it is theft even if the idea of a Baby Boomer Revolution is a joke.

How far are we willing to go to fix the fiscal stuff? - Pretty damned far i'd reckon. 

jgroves4ward2
jgroves4ward2

@RWCook @jgroves4ward2 @grog656  From the Atlantic quoting CBO data - http://www.theatlantic.com/business/archive/2012/01/the-10-most-important-charts-in-cbos-new-economic-report/252280/.  First, Bush did start the war in Iraq...remember lying about WMD or do you believe there were?  You can't put a cost on the amount of human life lost because of his and Cheneys lies.  Second, do you really think that when the deficit got so huge right after Obama took office that was because of him?  He walked into a frickin mess.  Unemployment continued due to Bush's policies and it was only when Obama started getting legislation passed that the unemployment numbers started moving back up.  Please, read something other than Fox news.  Go onto the CBO website and read what they say.  I'm no huge fan of Obama and if his actions caused the recession then damnit, I'm not going to defend him.  The recession started in the Bush years and hit it's peak during Obamas first 2 years in office.  It was only due to his actions that we are able to start coming back.  In fact, the deficit has actually shrunk  - http://www.cbo.gov/publication/43656.  So, you lost.  Obama is President for another four years and most likely another democrat will win again because the GOP ways are outdated and proven not work.

grog656
grog656

@jgroves4ward2; Bush did not start any war.  Remember 9/11?  And don't use the old liberal argument about WMDs in Iraq, when even Hillary and Kerry said they were there.  Tell me what war this country has been involved in that was "funded."  How do you "fund" a war?  That is a typical, ignorant liberal remark. Tax cuts did not create the financial mess this country faces.  Out of control spending, by both sides did.  The home mortgage industry contributed.  Union wages and union contracts did.  If anything, tax cuts is what is needed to put more money into the economy.  I don't know about you, but I'm all taxed out.  You proved your liberalism by showing your butt.  Does jgroves want a cracker?  Open you eyes.  You have been blinded by the light of your messiah.  Such a shame.  

jgroves4ward2
jgroves4ward2

@grog656 Obama's mess?  Seriously?  WTF are you talking about.  Obama did not set forth the Bush era tax cuts.  Obama did not start two wars that were totally unfunded.  If there is a parrot in the room, it is you sir.