A recent proposal by Andrew Biggs and Alicia Munnell in a brief from the Center for Retirement Research at Boston College created a stir in the workplace retirement market that has led to a couple of strong rebuttals this week from fellow economists.
The controversial proposal from Munnell, director and founder of the CRR, and Biggs, a senior fellow at the American Enterprise Institute, suggests repealing the tax exemption for employer‐sponsored retirement plans and IRAs and using that new revenue to address the majority of Social Security’s long‐term funding gap.
“Redirecting the tax expenditure to Social Security would reallocate existing funds that do not significantly improve retirement income security to a program that indisputably does,” the CRR brief stated. “The front-loaded nature of savings from reducing the tax expenditure also could provide time for other changes to Social Security to be phased in. Finally, linking reductions to the tax expenditure to maintaining Social Security’s solvency could overcome the legislative inertia that has for years delayed action on Social Security reform.”
• Read the CRR brief in its entirety here.
Here’s a quick look at why economists at the Cato Institute, a think tank dedicated to the principles of individual liberty, limited government, free markets, and peace, and the Mercatus Center, a research center at George Mason University that advances knowledge about how markets solve problems, believe the CRR proposal is misguided (with a tip of the cap to American Retirement Association CEO Brian Graff for flagging these responses on LinkedIn.)
Cato Institute
A Feb. 1 response to the CRR brief, titled, “The Case against Raiding Private Savings to Prop Up Social Security,” written by Adam N. Michel, director of tax policy studies at the Cato Institute, starts out by saying there are many reasons to object to the Biggs‐Munnell analysis, its impact on Social Security, and the implications for the federal budget.
“However, the crux of their argument—that tax‐advantaged retirement accounts ‘do little to increase retirement saving’—is an overconfident misinterpretation of the academic literature that does not acknowledge the broader economic benefits of private saving,” Michel writes. “The overwhelming evidence is that tax‐advantaged accounts significantly increase private savings.”
He goes on to say that the balance of the evidence suggests raiding Americans’ private retirement savings to prop up Social Security would significantly reduce private retirement savings and slow capital accumulation necessary to sustain a growing economy.
“Increasing taxes to prop up the current broken Social Security system at the expense of economic growth should be avoided,” Michel concludes. “Increasing taxes that directly reduce personal savings and undermine the private alternative to the broken government‐run system would be particularly destructive to America’s future retirees.”
• Read the Cato Institute response in its entirety here.
Mercatus Center
The Mercatus Center’s response to the brief, “Social Security Needs Fixing, Tax Increases on Savings Are Not the Solution,” was written by economists Veronique de Rugy, Charles Blahous and Jason Fichtner.
“Instead of ending an inequitable tax preference, the Biggs-Munnell proposal would raise taxes massively by effectively double-taxing retirement savings.”
It starts out by lamenting that few politicians are willing to show the political courage necessary to propose reforms that would put Social Security on a sustainable financial path, but at least some scholars are still offering creative ideas to help solve the problem. But the idea espoused by Biggs and Munnell rests on what they call two mistaken foundational assumptions. From the Mercatus Center’s Jan. 31 policy brief:
“First, its authors propose to end the current tax-deferred treatment of retirement savings accounts, including employer-sponsored retirement plans and IRAs, arguing that it is the equivalent of an inefficient, regressive spending program whose funds could be better used elsewhere. Second, the authors propose to bail out Social Security using the trillions in tax revenues generated by the change. While we are no fans of our current income-tax system or many of the spending programs administered through the tax code and agree that changes are necessary, we find that, instead of ending an inequitable tax preference, the Biggs-Munnell proposal would raise taxes massively by effectively double-taxing retirement savings.”
While the authors profess to having the utmost respect for Biggs and Munnell, they say the plan would fail to address the serious challenges within Social Security itself, in addition to significantly weakening retirement savings outside of the Social Security program.
In conclusion they say, “The Biggs-Munnell proposal, while well-intentioned, is a misguided solution that could have far-reaching negative consequences.”
• Read the Mercatus Center response in its entirety here.
SEE ALSO:
• New Brief Argues for Reallocating 401(k) Tax Expenditures to Social Security
• Retirement Preparation Without Tax Preferences? Part 1