Discouraging Retirement Savings Is No Way to Reduce the Federal Deficit

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It’s a fact that runaway spending, not lack of revenue, is the cause of long-term federal deficits. Still, some continue to push for higher taxes to solve the problem. A favorite tool of would-be revenue raisers is to eliminate “tax expenditures”—revenue the federal government “forgoes,” they say, due to tax preferences given to priorities like employer-sponsored insurance, mortgage interest payments, and contributions to retirement accounts. (Of course, since the money was never Uncle Sam’s to begin with, it’s inaccurate to say the federal government is somehow deprived by collecting less revenue.)

Eliminating certain tax expenditures, however, would not raise enough revenue to fix the problem, and it would discourage behavior that is good for the economy and for Americans’ financial security.

Removing the tax preference for retirement plans in particular would do more harm than good. Writing for The Washington Post, columnist Lori Montgomery highlights a recent study from the American Society of Pension Professionals and Actuaries, which she says “suggests that the accounts would have to be closed, or contributions sharply limited, to realize much in the way of budget savings—a move that could undermine some of the nation’s most popular retirement tools.” Discouraging personal savings for retirement would leave future generations of senior citizens more dependent on government, placing greater strain on the Social Security program, which already accounts for $9.1 trillion in unfunded promises.

Moreover, Montgomery explains, “traditional methods dramatically overstate the amount of revenue that ultimately will be lost.” Estimates show that, over the next five years, the tax preference given to retirement plans will reduce federal revenue by approximately $600 billion. But that doesn’t mean removing it would raise revenues by the same amount—instead, says Montgomery, “people would probably shift their investments to other tax-preferred vehicles.”

One reason the left supports eliminating the tax preference for retirement savings is a false belief that it disproportionately aids the rich. In fact, the opposite is true. A recent Employee Benefit Research Institute survey found that those most likely to reduce their savings as a result of modifications to the tax exclusion for retirement savings would be Americans with the lowest income, lowest amount in current savings, and lowest education levels.

The Heritage Foundation has outlined a better plan to eliminate federal deficit spending while encouraging personal savings and investment. Our plan would transform the tax system so that only the portion of an individual’s income that is spent would be taxed. Savings and investment would be tax-exempt until the money was withdrawn for use. As the authors explain, “We end today’s disincentives to build savings—whether for retirement or for buying a house—by taxing only income that is spent on consumption, so Americans can build better economic security for themselves and their families.” The Heritage plan also creates better ways for Americans to build retirement savings, including automatic enrollment in a retirement savings plan owned and controlled by the individual unless he or she chose not to participate.

Finally, the plan strengthens Social Security to better serve its intended mission: protecting seniors from poverty. Under our vision, seniors would receive a flat benefit worth more than today’s average Social Security benefit payment, keeping all seniors above the poverty line. The very wealthy would no longer receive Social Security payments, as benefits would be reduced on a sliding scale as individuals’ non-Social Security retirement income increased. By targeting aid to those who need it most, the Heritage plan succeeds at restoring Social Security to solvency and providing true income security for seniors.

When it comes to deficit reduction, lawmakers have a clear choice. They can continue the unaffordable spending that exists under the status quo, raising taxes to pay for it and crippling the economy on the way. Or, Congress can reduce the size of government, encourage savings and investment in the future, and strengthen the safety net provided by programs like Social Security.

To learn more about the Heritage plan to save the American dream, visit http://savingthedream.org.

Source material can be found at this site.

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