What fresh 401k hell is this?
Retirement accounts as currently structured are far from perfect, and incentives need to be refined, but Kellogg School of Management professor Benjamin Harris has an idea so bad we’re glad academics are (mainly) confined to ivory towers.
In a classic example of theory versus practice, the former chief economist to Vice President Joe Biden (!) begins a recent Wall Street Journal piece by noting that “Over the next five years, the federal government will provide subsidies in excess of $1 trillion for retirement saving, according to estimates from the Joint Committee on Taxation.”
We’ll stop him right there. For the gazillionth time, allowing workers to keep more of their money is not a subsidy, it’s allowing workers to keep more of their money.
Rather than figuring out “how to pay for it,” federal and state governments might be forced to become more efficient, just like the companies and people they tax when revenues nonetheless slow.
The thrust of his argument is that because lower-income individuals don’t pay taxes, they’re disproportionally denied the benefits of tax deferral (seriously).
“Rather than making the subsidy dependent on tax rates, savers should get a transparent upfront credit for putting money into a retirement account—say 25% of contributions,” he says by way of alternative.
For someone worried about expensive subsidies, the cost isn’t addressed beyond “The benefit should be capped to avoid the subsidy from growing out of control.”
Good luck with that in the bat-crap crazy beltway corridor.
“This reform isn’t without shortcomings,” Harris mercifully admits. “Swapping a deduction with a flat-rate credit will lower the saving benefit for select high-income taxpayers, who may reduce contributions to retirement accounts. That could lead to a small number of employers dropping their plans altogether.”
We’d ask him to show his math on that last point, not that it would matter much. We’ve said it before and we’ll say it again—“fully paid” today means a major mess tomorrow.
We’ve got a system that needs to be refined but is nonetheless working. No need and not smart to completely upend it in a quest for politically-motivated perfection, an oxymoron if there ever was one.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
