Thursday, May 30, 2013

Wasting Retirement Tax Incentives

Wasting Retirement Tax Incentives

The Congressional Budget Office estimates that we spent $137 billion on tax expenditures associated with pension and retirement benefits in fiscal 2013.[1]  That’s about 0.9% of GDP.  In the next ten years, the CBO estimates we will spend another $2 trillion in tax expenditures on retirement.  What is a tax expenditure?  When Congress creates a deduction in the tax code, the federal government forgoes the revenue it would otherwise collect because taxpayers are able to deduct certain personal expenditures from their income.  Instead of sending someone a check as part of a grant, tax expenditures are giving taxpayers money by lowering their ultimate tax liability.    While Congress is attacking spending programs, it’s giving tax expenditures a free pass.
Early Days (1996)
I don't think many people would dispute that encouraging people to save for retirement is a laudable goal.  Thus, providing deductions for pension and retirement contributions seems like a perfectly sensible idea.  Without the deductions, taxpayers might otherwise spend too much on current consumption and leave themselves without sufficient resources to fund their retirement years.  So it shouldn't come as a surprise that Republicans and Democrats have both supported tax deductions that encourage retirement savings.

There’s only one tiny problem with our $137 billion tax expenditure for retirement.  It’s largely a waste of money.  Roughly $90 billion, or 66% of the benefits, accrue to the top 20% of taxpayers, and the top 1% of all taxpayers receive 14% of the benefit.    While I’m sure that these folks thoroughly appreciate the government’s largesse, this is an absurd waste of precious tax dollars.  We find ourselves with a long-term structural deficit, and our only solution, so far, has been an across-the-board expenditure reduction  (sequester) of discretionary spending that unduly burden our poorest citizens.  Meanwhile, our wealthiest citizens are enjoying a form of retirement welfare.

Just like you, I’ve taken the various retirement deductions year after year.  It has, undoubtedly, helped to swell my retirement nest egg.  Did I really need a sizable boost from the federal government to build my wealth?  Absolutely not.  These deductions have merely built up the amount of money that the top 20% will leave to their heirs.   Ironically, that money will never be properly taxed because Congress has more or less destroyed the inheritance (death) tax.

The retirement deductions are, of course, good for money managers.  The top 20%, and even more so the top 1%, have sizable account balances.  As a result, there are hefty fees to be earned from managing their money.  Meanwhile, the remaining 80% have relatively paltry account balances, so their money is shunted into all sorts of automated programs and mutual funds that bleed away fees and don’t add value.  In the end, many in the bottom 80% will have entirely inadequate retirement net eggs despite the tax benefits.

It is a dismal picture.  We have tax policies that mostly help the people who don’t need help to save.  Meanwhile, the people at the bottom are left to fend for themselves.  We should be getting a much better return on the $137 billion we’re spending to promote retirement security.


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