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