Washington Targets Retirement Tax Breaks
BOSTON (TheStreet) -- Amid a backdrop of deficit concerns, debate over the future of Social Security and Medicare and a looming government shutdown, tax deferrals for retirement plans could be on the chopping block.
Talk in Washington, spearheaded by Congressional leaders including Speaker of the House John Boehner, R-Ohio, and Senate Budget Committee Chairman Kent Conrad, D-N.D., is that tax reform needs to tackle so-called tax expenditures. These incentives, which account for roughly $1 trillion in bypassed budget revenue each year, have been described by Conrad as a "back-door way of spending federal money."
|House Speaker John Boehner, an Ohio Republican, is spearheading talks about tax reform that could affect tax incentives for retirement plan contributions.|
Among these tax expenditures are exclusions for such items as mortgage interest deductions and employer contributions for health care.The deferral of taxes on contributions to IRAs, 401(k) plans, variable annuities and other retirement savings vehicles are among the incentives that could be reduced or eliminated. Typically, contributions to these accounts grow tax free until they are withdrawn at retirement, then are taxed at what is usually a lower rate post-retirement. Retirement-tied tax incentives will cost the government about $142 billion in forgone tax revenue this year and about $788 billion over the next five years. The value of the incentives is challenged by critics who claim 80% of the benefits are claimed by the top 20% of income earners. Testifying before the U.S. Senate Budget Committee on March 9, Robert Greenstein, president of nonpartisan research organization the Center on Budget and Policy Priorities, spoke against the current system of tax expenditures and described the intended incentive for retirement savings as regressive. "The costs of tax expenditures are large," he said. "In 2010 ... tax expenditures -- both individual and corporate -- amounted to $1.05 trillion. This greatly exceeded the cost of Medicare and Medicaid combined ($719 billion), Social Security ($701 billion), and non-security discretionary programs, which stood at $589 billion, a little over half of the cost of tax expenditures." "As is the case with the mortgage interest deduction, high-income individuals receive the largest immediate benefit of the exclusion, even though they are the people most likely to save anyway in the absence of a government tax subsidy," he said.
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