A recent research brief co-authored by Alicia Munnell, assistant treasury secretary under President Clinton, and Andrew Biggs, senior fellow at the American Enterprise Institute, has sparked a heated debate on the effectiveness and fairness of 401(k) plans and Individual Retirement Accounts (IRAs). The two economists, who represent opposing ideological camps, argue that the federal government should abolish the 401(k) and IRA, citing that the tax-favored retirement accounts primarily benefit wealthy Americans.
The 401(k) and IRA were initially designed to help Americans save for retirement, but the federal data suggests that these tax-advantaged retirement accounts disproportionately benefit the affluent. According to the Survey of Consumer Finances, the median retirement account for the top 10% of income-earning households held $559,000 in 2022, while middle-income Americans, those in the 40th to 60th percentile by income, had a median retirement plan of just $39,000. Moreover, nearly half of middle-income households had no retirement savings.
The authors argue that the tax subsidies for retirement savings are ineffective in encouraging more Americans to save for retirement. The share of workers aged 25 to 64 who participate in employer-sponsored retirement plans has risen only 2 percentage points, from 51% to 53%, from 1989 to 2022. The authors contend that the tax subsidies are a “broken” system that disproportionately benefits the wealthy.
The authors propose modifying the subsidies to reward responsible saving without lavishing tax breaks on the wealthy. For instance, the tax subsidy could be capped for savers who amass $500,000 or $1,000,000 in retirement money, or the tax benefit could be limited to the first $10,000 or $20,000 in annual contributions.
However, not everyone agrees with the authors’ stance. Brian Graff, chief executive of the American Retirement Association, flagged the paper on LinkedIn with the comment, “No, it’s not April 1st… and I personally cannot think of a more preposterous idea.” Much of the financial services industry applauds tax-favored retirement plans, saying they deliver a dignified retirement to millions of lower- and middle-income Americans.
Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, a nonprofit that works with benefit providers, emphasizes that 401(k) plans are crucial for the middle class. “A lot of middle-class people have 401(k)s, and typically, that’s the bulk of their savings outside of their homes,” Copeland said. He argues that stripping away the tax benefits would eliminate the incentive for employers to offer retirement savings plans, which would disproportionately hurt middle-class workers.
Moreover, some experts argue that the proposal to modify the subsidies could have unintended consequences. For instance, capping the tax subsidies for savers who amass $500,000 or $1,000,000 in retirement money could discourage middle-class Americans from saving for retirement. Similarly, limiting the tax benefit to the first $10,000 or $20,000 in annual contributions could harm higher-income workers who rely on their retirement savings to fund their retirement years.
Additionally, some experts argue that the proposal to lower the age by which savers must begin drawing down their retirement accounts could exacerbate the problem of retirees outliving their savings. The current system already requires retirees to start drawing down their retirement accounts by age 72, and raising that age could further strain retirees’ finances.
The debate over the future of 401(k) plans and IRAs highlights the challenges of balancing the need for retirement savings with the need for fairness and equity. While the current system has its flaws, any proposed changes must carefully consider the potential consequences for savers across the income spectrum.
In conclusion, the debate over the future of 401(k) plans and IRAs is a complex issue that requires careful consideration of the potential consequences for savers across the income spectrum. While the current system has its flaws, any proposed changes must balance the need for retirement savings with the need for fairness and equity. Ultimately, policymakers must work together to find a solution that encourages responsible saving while ensuring that all Americans have access to a dignified retirement.
