DC Wants Your 401(k) Money

President Barack Obama's bipartisan National Commission on Fiscal Responsibility and Reform offered a new idea that would hurt 401(k) plans.

The idea: Impose a so-called 20/20 cap contributions to 401(k) plans. That means workers would have to cap their tax-preferred contributions to either $20,000 or 20% of income, whichever is lower.

But the Employee Benefits Research Institute [EBRI] says this cap would sting lower income earners nearly as much as high-wage workers.

These retirement plans are now lumped into other tax expenditures, which include the mortgage interest deduction, tax deductions for charitable donations, and tax-free employer health benefits. It appears everything now is on the table. That means possibly 401(k)s.

EBRIs analysis found that, although the idea to cap was offered to curtail tax benefits enjoyed by just high-wage earners, the cap would actually cause the second-worst reduction in these tax-free contributions among lower wage earners.

Specifically, EBRI says that while the dollar amount cap would hurt high earners, the percentage cap would hit lower earners hard. A 20/20 is a hefty cut in tax deductibility, given these plans employer matches, typically fifty cents matched to every $1 workers contribute, or even a $1 for a $1 match.

Already the tax law caps employee deductions at $16,500. When you add together both worker and employer contribution limits to 401(k) plans, the law says the cap is either a dollar limit of at least $49,000 per year, or 100% of an employees compensation, whichever is less.

High-wage earners often set aside the most money in 401(k) plans. But EBRI says this suggested cap would cause lower income earners to set aside less, since they dont have comparable levels of discretionary income.

EBRI says it based its analysis on data supplied by 401(k) plan administrators. The data covers about 50% of the assets in 401(k) plans as of the end of last year.

The federal Office of Management and Budget says the government forgoes collecting about $143 billion a year due to retirement saving deductions for pensions and defined contribution plans cost, or 401(k)s. That tax revenue is likely lower, because taxpayers have to pay taxes on draw downs from these plans in retirement.

Recently, the House Subcommittee on Health, Employment, Labor and Pensions took testimony on the deductibility of 401(k) contributions and ways to limit the plans. Reuters reports that the American Benefits Council and the American Society of Pension Professionals and Actuaries testified, the latter discussing its latest study contesting how much 401(k) deductibility actually costs the U.S. Treasury.

Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis reportedly testified once again about the issue, noting: "There's no evidence that it [401(k) deductibility] increases savings; much of the academic literature shows that higher income people are moving investments they would have made anyway [in taxable accounts] to a tax-preferred account. And there are 25 million taxpayers in the bottom two quartiles who don't take deductions, so they're getting no subsidy at all from the federal government on their contributions."

When you read comments like this, ask yourself: What do experts think DC does with our tax dollars? And hasn't Congress already raided and spent Social Security funds? Has Congress's administration of your tax money been so state of the art? Do experts like this want all of us to lose our retirement savings and be on the government dole via Medicare?