A new idea to address Social Security’s looming funding gap proposes that Congress eliminate tax benefits for 401(k)s to find funds to continue paying benefits to retirees.
According to a brief published by the Center for Retirement Research at Boston College, the end of some tax preferences for pension plans could be related to a $185 billion annual increase in tax revenue, which would cover most of the pension funding gap social.
Social Security is facing a funding gap. If no action is taken, Social Security benefits risk being cut by 20% in 2034, the target date for surpluses in Social Security trust funds to run out.
Even though it’s a decade away, Alicia Munnell, a management science professor and director of the center, says the goal of the research is to spur action from lawmakers who haven’t shown much progress on other solutions to fixing Social Security.
“The discussion is usually about benefit cuts rather than tax increases,” Munnell says. “This seemed like a way to avoid that debate and break the deadlock.”
Repeal 401(k) tax benefits to fund Social Security?
Tax benefits for 401(k)s allow you to contribute pre-tax earnings to your account, often with an employer contribution equal to a small percentage of your salary. Typically, you delay paying taxes until you retire, when you tend to be in a lower tax bracket. More than a third of working-age Americans have 401(k)-style retirement accounts, according to Census Bureau data.
The brief from Boston College’s Retirement Research Center supports the case for repealing 401(k) tax benefits with statistics showing that higher earners benefit more.
“Taxpayers with higher incomes are more likely to have access to employer-sponsored retirement plans, are more likely to participate in their employer’s plan, and contribute more when they participate,” Munnell and co-author Andrew Biggs, member senior at the American Enterprise Institute, wrote in the memoir.
The fact that higher-income people benefit more from 401(k) tax benefits has been recognized by both Democrats and Republicans in Washington over the years, but in different contexts. Some Democrats have called for increasing 401(k) tax benefits for low-income people, while there has been Republican pressure to reduce 401(k) tax subsidies.
It’s unclear whether the idea of repealing 401(k) tax benefits would be more appealing to the public than other proposed solutions that are typically unpopular, such as raising taxes or raising the retirement age.
The report’s authors argue that 401(k) tax benefits don’t incentivize Americans to save more for retirement – or at least not to a significant degree, and primarily benefit high-income people.
But many Americans love their 401(k)s and consider them critical to their retirement planning. Experts already worry that Americans aren’t saving enough for retirement in accounts like 401(k)s, and eliminating the tax benefits could be a further setback.
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