America’s Gold Mine for the
Golden Years
By Gerald E. Scorse, Guest
Columnist to Progressive Charlestown
America’s retirement system is coming up short: too few savers, too little being saved. Maybe so, but the system is paying off in spades for millions of retirees.
The best-off have tens of
thousands of dollars pressed into their hands, year after year. They’re taking
minimum required distributions, mandatory starting at age 70 ½ for holders of
tax-deferred retirement accounts. The others make voluntary withdrawals, which
can begin at age 59 ½.
All the payouts stem from the
Employee Retirement Income Security Act of 1974 (ERISA) and its offshoots. The legislation
mapped out a gold mine both for workers and the Treasury.
Almost from the start though,
retirement accounts have suffered from Rodney Dangerfield-itis: they don’t get
no respect. Let’s take a close look at the reasons, and discover why ERISA richly
deserves the nation’s thanks.
The central complaint is that the
law triggered the move from defined-benefit pensions to defined-contribution
accounts—which are less dependable, and shift the risks from employers to
workers.
The complaint may be valid, but it leaves out huge chunks of the
truth. Most workers never had retirement plans in the first place, and ERISA
set out expressly to fix that.
The first Individual Retirement Accounts (IRAs) were open only to employees not covered at work. By the thousands, they walked into brokerage offices and set up their own, first-ever accounts.
Rollovers, which workers could
carry from job to job, were also created by ERISA.
Congress later authorized
employer-sponsored IRAs, prodding companies without pensions to offer a
retirement benefit—and, ironically, setting off the account conversions.
Another criticism holds that the
tax breaks on the accounts (pre-tax contributions and tax-deferred growth) cost
too much, and drive up the federal deficit. The Joint Committee on Taxation
ranks retirement accounts as the second most-expensive tax break in America.
Except that they aren’t, actually.
The short time frame for the numbers compiled by the Joint Committee overstates
the cost of tax-deferred retirement accounts. The retirement break is a fiscal
chameleon: generous for decades, demanding on the back end.
It’s the only tax break that pays
the Treasury back, by the billions, every tax season—exactly as it was designed
to do. The case could be made that the retirement break effectively costs
America nothing. After all, the Treasury ultimately gets its cut of both
contributions and investment growth.
Consider the billions the accounts
are already repaying. For 2013, the latest available figures from the Internal
Revenue Service show that about 13 1/2 million returns reported more than $213
billion in taxable income from tax-deferred accounts. Straight ahead, two
inexorable trends are set to drive the numbers ever higher.
In 2011, Americans 65-and-over
represented 13.3% of the population; by 2060 it’s expected to reach 20%.
Separately, the first of America’s 78 million baby boomers will reach the
minimum distribution age of 70 ½ in 2016.
That will touch off annual
required distributions for the most affluent, continuing into the 2030s and
beyond. As more and more boomers take required distributions, and more and more
simply tap into their accounts, the Treasury will be reaping what ERISA sowed
over 40 years ago.
The law’s middle initials stand
for “retirement income security.” Congress could reaffirm that high purpose by
dedicating the inflow to Social Security, which is under pressure from the same
demographics.
Social Security provides most of
the cash income for almost two-thirds of beneficiaries. The extra tens of billions
in annual revenue from retirement accounts could help it out of a fiscal tight
spot, without cutting benefits. (Of course the stock market will have a major
influence on the revenue numbers, and there are no guarantees on that score.)
Getting back to the complaints
about the accounts, nothing has caused more grousing and grumbling than minimum
required distributions. They add nicely to income, but they also add, not so
nicely, to taxes: the haves take a hit of 39.6%.
Justice Oliver Wendell Holmes Jr. laid
down the classic case for taxes, calling them “what we pay for a civilized
society.” In this case they’re simply a payback for the break we get throughout
our working lives. The break compounds as well, helping fatten our accounts
over all those years.
Much is continually made of the
flaws in America’s retirement system; little is ever made of its successes.
Here’s to ERISA for helping make the golden years more golden for millions—and
depositing more gold in the Treasury in the bargain.
Gerald E. Scorse helped pass the bill requiring basis
reporting for capital gains. He writes on taxes.
© 2016 Gerald E. Scorse. This
article was published in The Hill