The intellectual case for getting rid of tax-advantaged retirement plans is strong, and the political case is catching up.
www.wealthmanagement.com
Had this link in a retirement related email I get weekly. I found it pretty interesting ..
If you are among the 56% of US workers with a retirement plan, I have some bad news for you: Your 401(k) will be gone in 10 years, tops. Not the money, thank goodness — Americans have trillions of dollars in these accounts, and there is an entire industry built around them — but the plans themselves.
I have been seeing more and more about this lately...and it all comes down to the Govt and money....
There has been a brewing intellectual movement to get rid of the 401(k) for several years, with scholars on both the right and left questioning its value. And as the federal government gets increasingly desperate for new sources of revenue, the tax treatment of 401(k)s is a likely target. There are good policy reasons to end it, but the question remains: Will Americans still save for retirement?
The 401(k) is not tax-free but what is known as tax-advantaged. Contributions made while working are not taxed, but participants pay taxes when they withdraw the money during retirement. Whether there is a big tax savings depends on the tax rate in retirement — which is usually lower because retirees tend to have lower earnings. Savers also avoid capital gains taxes on returns.
All of this cost the government an estimated $185 billion in 2019, or 0.9% of GDP. That’s not nothing. And in theory it’s justifiable because it creates a powerful incentive to save for retirement. More retirement savings have a triple benefit: for the economy overall, since they fuel growth; for the government, since retirees with income are less likely to be a burden on the state; and, of course, for workers who might not save enough today and regret it later.
Then again, maybe not. The first rumblings that the benefits of the tax breaks may be overstated came in a 2014 study of Danish savers. Without tax-advantaged accounts, it found, people just put their money in another kind of account. People did save more in retirement accounts, but that’s mostly because of automatic paycheck deduction. Subsequent research in other countries found similar results. Not only did the tax incentive fail to encourage more saving; the biggest beneficiaries tended to be the wealthy.
One alternative...
Enter the employer-sponsored liquid account. Like a retirement account, it is funded by payroll deductions, but unlike a 401(k), it allows employees to withdraw money without a penalty when needed. As these accounts grow in popularity, they may displace the 401(k). More liquid accounts, similar to a Roth IRA, have been become popular in Canada, and Canadians are saving more in them than in the tax-advantaged retirement accounts.
Again, it's easy to point to the $185 Billion in theoretically lost revenue, but the counter factual is more difficult.
First, there would be no lost revenue gained by getting rid of 401k. That $185 Billion in "lost tax revenue" only exists if everyone that is currently saving in their 401k, is still saving in investments without the 401k.
The answer is they wouldn't. So if you do away with 401ks, there would be no investing to tax that $185 Billion from.
So the government is not losing a penny in tax revenue by allowing the 401k.
Further, without people having a 401k to help them in retirement, millions on millions of elderly people would be more dependent on government programs than ever before, easily costing for more than the $185 Billion of revenue that will never be collected in taxes.
As for comparing the US to Danish people, and saying the tax benefits the wealthy more.... First, we're not Danish. Danes have their own culture. I support teaching people in schools how to save and invest, and instilling that into kids. But we're not doing that. Danes are.
If you try and take away 401k, and magically believe that our Americans that have never been taught to save and invest, will magically turn into Danes, and start saving like a Dane, you are wrong. I can't count the number of European style programs we have tried here, that never had positive effects, because people think that it's the policy that makes the culture, when it's the culture that makes the policy.
And lastly, I don't care if wealthy benefit more. Who cares? Why should I penalize myself with higher taxes on my investments, just because some rich guy is doing the same as me, with another zero on the end? That's lame and stupid. We should not chop off our own legs (economically speaking), because rich benefit from legs more than poor people. That is greed and envy based logic, and I do not subscribe to it.
Stop whining about what rich people do, and start doing what they do.
