According to a U.S. government report, the Social Security “trust fund” will run out of cash in 2033, three years earlier than the most recent forecast. Anyone paying attention to this demise understands the importance of saving for his or her own retirement. Most Americans include an individual retirement account (IRA) or 401(k) a part of their savings strategy because 401(k)s allow workers to defer the taxability of what they earn today until they take it as income during retirement years. But with $16+ trillion of government debt, some in Washington are looking at the $18 trillion currently sitting in IRAs as part of the fix.
At least two plans are under consideration, one which calls for a reduction in the amount of annual contributions exempt from current taxation from $50,000 to $20,000. The other ends deferred taxation altogether in exchange for an 18% tax credit placed in the retirement account. Washington wants the tax revenue now, and reports suggest that this type of change would increase government revenue by as much as $458 billion annually. Additional details are available at: www.nypost.com/p/news/business/plunder_CrD9s6MElVsEIJj2IVgHuK.
There are many problems with this proposal. First, if the federal government is going to tax income, then it seems reasonable that Americans should be able to defer income from working years to non-working years. The current 401(k) allows you to do that, at least to some extent.
Second, anyone who thinks that the 18% tax credit given will actually survive future attacks on “the rich” is fooling himself. Future leftists will refer to this as another loophole to be closed because wealthy retirees (i.e., those who lived frugally and saved during their working years) just don’t need it.
Third, disallowing Americans to defer taxation on retirement contributions is a disincentive to saving. This means less capital available for business expansion today and lower personal income levels in the future.
Finally–and most importantly–this type of proposal targets REVENUES as the problem when SPENDING is the real issue. Every dollar Washington SPENDS is a tax; it must come from taxpayers today, taxpayers tomorrow if it is borrowed, or all of us if it is financed by printing more currency. Our federal government has a spending problem. Tax overhaul is necessary, but not the core problem.