Keeping America’s retirement promise
By Gerald E. Scorse, Progressive Charlestown special contributor
Too many Americans are
saving little to nothing for retirement. According to one study, 45 percent of working-age households “do not
have any retirement account assets.” Congress could sharply improve those
numbers by adopting dynamic scoring of retiree distributions. The move could
lead to millions of new accounts, and a fairer sharing of America’s retirement promise.
That promise was the whole
idea behind a breakthrough reform over 40 years ago. Let’s see where it came up
short, and how the country can still make good for those left
behind.
In 1974, a far-sighted
Congress created a new benefit for workers not covered by traditional pensions.
It set up Individual Retirement Accounts (IRAs), combining pre-tax employee
contributions with tax-deferred capital gains (tax-free, actually). A major sweetener, employer contributions, came
later with 401(k)s.
The accounts rapidly took
hold, but too many companies don’t participate: over half the labor force lacks
access to a workplace savings plan. No surprise, it’s mainly low- to
middle-income employees who go without. Some states are trying to set up their own programs, but
federal action would be far more efficient—and a new rule gives Congress a
golden invitation.
Bills that involve fiscal policy are routinely scored to estimate their effect on budgets, revenues and the federal deficit. Dynamic scoring looks beyond the usual 10-year budget window, giving long-term benefits more time to overtake upfront costs.
In 2015, Republicans passed a new rule requiring dynamic scoring of any bill
with a budget impact greater than 0.25 percent of gross domestic product
(roughly $45 billion for that year); they want to show the pro-growth results
of lower taxes.
Retirement accounts deserve
the same dynamic scoring, and the IRS already tracks the figures. According to
the latest estimates, taxable income from retiree withdrawals
totaled over $234 billion in 2014.
That $234 billion is the
golden invitation: with those numbers (and bigger ones coming), Congress could
increase retirement account enrollment with dynamic scoring: in essence, it
could use the billions flowing from existing accounts to erase the cost of
adding new ones.
The Joint Committee on
Taxation ranks retirement accounts as the second most-expensive tax
break in America. That’s more than a little misleading.
The retirement break forgoes
taxes on contributions, but the Treasury gets that money back plus interest
through taxable withdrawals.
In addition, the Committee’s
estimates stop at the 10-year window. Dynamic scoring would paint a totally
different picture: it would include both higher downstream tax revenues and the
multi-billions the accounts deliver to the economy. The numbers have never
figured in fiscal scoring, and they’re set to explode.
The most affluent of
America’s 76 million baby boomers began reaching the required minimum
distribution age in 2016. That will trigger years of upper-tier withdrawals,
stretching into the 2030s and beyond.
Separately, a demographic
tide is rolling in. The percentage of Americans 65-and-over stood at 13.3% in
2011; by 2060 it’s expected to reach 20%. For decades to come retirement
accounts will be spinning off ever-larger hundreds of billions; scores of those
billions will be flowing into the Treasury as tax revenue every year.
Far from a costly tax break,
retirement accounts are a gilt-edged investment. They enrich not only
individual Americans but the economy, the safety net, and the social fabric.
Congress has good reason to spread the wealth: to pass a follow-up reform that
makes the accounts workplace-available for millions of low- to middle-income
workers. By a date certain (2019, say), there’s no good reason why retirement
accounts can’t become a standard worker’s right.
The 1974 law that created
IRAs was the Employee Retirement Income Security Act. A generation and a half
later, Congress should finally offer a path to that security to those who need
it most.
There’s no better way to
keep America’s retirement promise.
Gerald E. Scorse helped pass the bill
requiring basis reporting for capital gains. He writes on taxes.
© 2017 Gerald E. Scorse