Three retirement experts, each much smarter than me, recently asserted that America’s “tax deferred” retirement plans and programs “… do little to increase retirement saving. …”[i]
Further, they suggest that “…Revenues saved from repealing the retirement saving tax preferences could be reallocated to address the majority of Social Security’s long-term funding gap.”[ii]
That change would negatively impact workers in their retirement preparation. Worse, depending on the employer response, it could reduce revenue to Social Security and Medicare.
As a simpleton corporate benefits practitioner, I have a few relevant observations about the Center for Retirement Research at Boston College’s recently published Working Paper, “The Case for Using Subsidies for Retirement Plans to Fix Social Security.”
First, a business school class I had in 1974, “Taxes and the Urban Poor,” confirmed a disproportionate number of children and older Americans lived in poverty. Back then, 43+% of age 65+ Americans lived in poverty, 78+% lived at or below 150% of the poverty line.[iii] I clearly remember a midday, May 1973 encounter with a few older Americans outside a grocery store in Miami, when more than one asked “Jack the tourist” for the store’s trading coupons that I had received at checkout[iv].
Second, in 1975, the first year we had Form 5500 reporting, the DOL recorded:
- 103,346 Defined Benefit (DB) pensions, 207,748 Defined Contribution (DC) plans, Total: 311,094
- 33,004,000 DB Participants, 11,507,000 DC Participants, Total: 44,511,000
- $185,950,000,000 DB Assets, $74,013,000,000 DC Assets, Total: $259,963,000,000
That’s an average asset value of $5,567 per DB Participant and $6,432 per DC Participant. There is “double counting” as some employers provided both plans.
I was unable to find median amounts for comparison (which may be substantially less, especially if you counted zeroes for any who were eligible but not participating). Less than 5% of the participants in the 1975 Form 5500 data were term vested as many, including “retirees,” cashed out to use 10-year forward averaging.
Before the Tax Reform Act of 1986, many DB pensions used final average pay formulas with age and service eligibility requirements and 10-year vesting. Many DC plans with thrift and profit-sharing designs also had eligibility and vesting provisions. As a result, retirement benefits were often highly concentrated among older, longer-service, higher-paid workers.
Third, in 2021, the last year for which we have Form 5500 reporting, the DOL recorded:
- 46,388,000 DB pensions, 718,736 DC Plans, Total: 765,124
- 31,235,000[v] DB Participants, 114,931,000[vi] DC Participants, Total 146,166,000 Participants
- $3,670,366,000,000 DB Assets, $9,499,141,000,000 DC Assets, $13,169,507,000,000 Total Assets
So, an average asset value of $117,170 per DB Participant and $82,651 per DC Participant.
Much has changed. Most DC plans now incorporate 401(k) features.
“More than two-thirds (67.4%) of companies allow employees to begin contributing … within three months of hire”[vii] compared to 40% 25 years ago. The percentage of plans that fully vest workers after three or fewer years of service has increased from 35.5% 25 years ago to 66.3%—an 87% increase![viii]
That is significant growth. It reflects a dramatic change away from benefits concentrated among higher-paid, long-service older workers to a broad cross-section of workers.
Fourth, one can only guess about the amount of tax-preferred savings that has already been distributed—whether in the form of rollovers to IRAs, or in cash (directly from a plan, or after rollover from IRAs). The Joint Tax Committee (JTC) estimated DB and DC plans and IRA flows for 2015 as $1.256 Trillion[ix]:
$881 billion was paid in cash to individuals. Assuming comparable numbers throughout the 21st Century, we have already seen more than $20 trillion in distributions—that is about two-thirds of the $33 Trillion estimated retirement savings assets in tax-preferred accounts as of year-end 2022.[x]
The JTC report shows 2015 contributions in the hundreds of billions of dollars—$435 to DC plans, $109 to DB plans, $25 to Traditional IRAs, and $18 to Roth IRAs—totaling $586 billion.
Remember that the “tax preferences” for DB and DC plans and Traditional IRAs are not a deduction, but a deferral from taxation until payout. So, if the net outflow to cash in 2015 was about $300 billion ($881 billion paid out compared to $586 billion contributed), that difference would be current, taxable income.
2021 DOL Form 5500 data show DB and DC contributions totaling $733 billion.[xi]
Fifth, last I looked, the estimates of age 65+ Americans living in poverty ranged from less than 3% to 10%.[xii] The Census Bureau defines poverty using an income measurement—ignoring most welfare benefits as well as assets/net worth.
To round out the comparison, here are median and average net worth estimates for older Americans[xiii]:
Sixth, would the three experts recommend the elimination of the tax preferences if there was no gap in Social Security funding? Keep in mind that we didn’t eliminate them in 1983 to shore up Social Security funding.
Many of these tax preferences have been in place for over 50 years, so did they only recently become costly, inefficient, and ineffective at prompting retirement preparation? And, if so, why stop with future contributions—why not accelerate taxation of all accumulated tax-deferred retirement assets?
So, no matter what economic models might predict, it is difficult to ignore the history of tax-preferred retirement savings and argue that the tax preferences haven’t prompted hundreds of thousands of employers with tens of millions of workers to adopt plans and nudge workers to participate.
Better options exist to “fix” the Social Security funding shortfall that wouldn’t break apart a system that has shown the progress documented here.
And what would Congress do with another $200 billion a year?
What have they done in the recent past with increased revenues? Well, since the turn of the century, we’ve seen annual federal revenues increase about $3 trillion a year and annual federal spending increase about $5 trillion a year—leaving us with an annual $2 trillion per year federal deficit, and a national debt that has increased from about $7 trillion to $34+ trillion.
Do you see any fiscal discipline in Congress? Despite adding $28 trillion to our federal debt, they have failed to address the funding challenges for Social Security and Medicare—both of which were known and obvious as far back as the mid-1990s and President Clinton[xiv].
Stay tuned for Part 2 coming soon…
I am always interested in your comments, corrections, criticisms, and suggestions. Send them to me at jacktowarnicky@gmail.com
Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor and consulting roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.
Disclaimer No. 2: Information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have tax and legal implications, and you should discuss this matter with tax and legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not and you/others should not use it as a substitute for legal, accounting, actuarial, tax or other professional advice. Any advice contained in this article was not intended or written to be used and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.
SEE ALSO:
• New Brief Argues for Reallocating 401(k) Tax Expenditures to Social Security
[i] A. Biggs, A. Munnell, M. Wicklein, The Case for Using Subsidies for Retirement Plans to Fix Social Security, Center for Retirement Research at Boston College, WP 2024-1, 1/1/24, Accessed 1/25/24 at: https://crr.bc.edu/wp-content/uploads/2024/01/wp_2024-1-1.pdf
[ii] Ibid.
[iii] U.S. Census Bureau, Historical Poverty Tables: People and Families – 1959 to 2022, Table 5. Percent of People by Ratio of Income to Poverty Level for All People and People Age 65 and Over: 1970 to 2022, Accessed 1/25/24 at: https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-poverty-people.html
[iv] Author’s Note: The trading stamps we received were either Publix Supermarkets issuing S&H Green Stamps, or Winn Dixie issuing “Top Value” stamps. I remember this encounter clearly as I used to lick the S&H stamps for my mom and paste them in the booklet – to later be redeemed for a couple of bucks.
[v] Department of Labor (DOL), Private Pension Plan Bulletin Historical Tables and Graphs 1975-2021. Importantly, of the 31,235,000 DB plan participants, only 11,642,000 or 37% are active, accruing a benefit. Accessed 1/25/24 at: https://www.dol.gov/sites/dolgov/files/EBSA/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf
[vi] Ibid. Importantly, of the 114,931,000 DC plan participants, 87,901,000, 77% are active, accruing a benefit.
[vii] Plan Sponsor Council of America (PSCA) 65th Annual Survey of Profit-Sharing and 401(k) Plans, Reflecting 2021 Plan Experience. See also: J. Towarnicky, Narrowing Retirement Savings Gaps, 5/15/19, Accessed 1/25/24 at: https://www.psca.org/news/blog/narrowing-retirement-savings-gaps
[viii] Ibid.
[ix] Joint Tax Committee, Estimating Leakage From Retirement Savings Accounts, JCX 20-21, 4/26/21, Accessed 1/25/24 at: https://www.jct.gov/CMSPages/GetFile.aspx?guid=ed1c9da4-f180-41cd-b3f9-b8afb9531d18
[x] Investment Company Institute, 2023 Fact Book, Accessed 1/25/24 at: https://www.ici.org/system/files/2023-05/2023-factbook.pdf
[xi] DOL, Note v, supra.
[xii] P. Gramm, J. Early, Another Wrong Way to Measure Poverty: The real rate is 2.5%, but the Census Bureau inflates it by excluding most social-welfare benefits. Wall Street Journal, 12/5/23, Accessed 1/25/24 at: https://www.wsj.com/articles/another-wrong-way-to-measure-poverty-welfare-biden-fd9018b1?page=6 See also: U.S. Census Bureau, Poverty in the United States, 2022, Table A-3, Poverty Status of People by Age, Race and Hispanic Origin: 1959 to 2022, Accessed 1/25/24 at: https://www.census.gov/library/publications/2023/demo/p60-280.html See also: J. Towarnicky, Retirement in America-A Life Of Poverty? 6/28/18, Accessed 1/25/24 at: https://www.psca.org/news/blog/retirement-america-life-poverty See also: J. Towarnicky, The Sky is Not Falling on Older Americans, 8/26/18, Accessed 1/25/24 at: https://www.psca.org/news/blog/sky-not-falling-older-americans
[xiii] Federal Reserve, 2022 Survey of Consumer Finances (SCF). The calculation of net worth includes: (1) all financial assets – transaction accounts (checking and savings), bonds, stocks, CDs, mutual funds, money market accounts, annuities, trusts, IRAs, retirement accounts, future pensions; plus (2) all non-financial assets – vehicles, primary residence, other residences, non-residential real estate, businesses and other non-financial assets, less (3) total debt – mortgages, home equity loans, lines of credit, credit card balances after the last payment, installment loans and other debt, including loans against pensions, life insurance and margin loans. Accessed 1/25/24 at: https://www.federalreserve.gov/econres/scfindex.htm
[xiv] J. Towarnicky, House, Senate Action Needed on Social Security, 10/23/17, Accessed 1/25/24 at: https://www.psca.org/news/blog/house-senate-action-needed-social-security
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.