Mark Twain said, “History never repeats itself, but it does often rhyme.” So, tell me if you have seen this before. The Republican Party is ascendent after a mid-term election result that saw them gain the majority in the House of Representatives, which they consider a clear repudiation of the policies under unified Democratic rule in Washington the previous two years.
The Democratic Party, however, breathed a sigh of relief since they still have the presidency for at least two more years and somehow retained control of the Senate in Congress.
Nevertheless, Republicans make no secret of their desire to roll back the legislative achievements achieved by the Democratic president in that time and, in particular, promise an epic battle over federal spending and budget deficits, using the debt ceiling as a specific point of leverage. 2011 or 2023, you ask? Well, it certainly looks like both.
The political fallout from that debt ceiling fight that first time around resulted in an age of austerity in Washington for the next several years in which all types of spending cuts and revenue raisers were on the table, including various proposals attacking the tax incentives for retirement savings.
It is instructive now to review those proposals again and highlight the potential damage to the retirement savings of American workers if they are enacted, since we will likely see the attacks on 401(k) plans continue to bubble up in the current budget debate that will consume Washington this summer.
20/20 Plan
In 2010, President Obama created the bipartisan National Commission on Fiscal Responsibility and Reform (nicknamed the Bowles-Simpson Commission after the names of co-chairs Alan Simpson and Erskine Bowles) to get the federal budget back into a better balance by raising taxes and reducing spending.
The Bowles-Simpson report was issued on Dec. 1, 2010. Buried in the report was a recommendation that suggested limiting retirement plan contributions to 401(k) plans to the lesser of $20,000 or 20% of income (hence the name 20/20 plan).
The proposal certainly would adversely affect the ability of workers to save. (Especially now since the 401(k) elective deferral limit is $22,500.) An Employee Benefit Research Institute (EBRI) analysis at the time showed that these reduced limits would result in lower account balances at retirement for all income groups.
For example, EBRI data showed that if the cap were in place, workers aged 36-45 in the lowest income quartile could expect at least a 10% reduction in their retirement account balances at age 62.
Obama Budget Proposal No. 1 — Retirement Savings Exclusion Cap
Like President Biden just did for the next fiscal year, President Obama issued detailed budget proposals during his presidency that proposed various tax increases on corporations and upper-income taxpayers. The Obama budgets included a proposal to place a 28% cap on the rate at which the retirement savings exclusion reduces a taxpayer’s income tax liability.
Since the tax incentive for retirement savings is a deferral, not a permanent exclusion, this proposal is more accurately described as a double taxation of contributions to retirement savings plans for anyone with a marginal tax rate over 28%.
For example, a small business owner in the 37% tax bracket would pay a 9% surtax on elective deferrals, then pay tax again at the full ordinary income tax rate when she retires.
Obama Budget Proposal No. 2 — Retirement Savings Accumulation Cap
A second proposal from those Obama Budgets capped the value of an individual’s retirement savings across all tax-preferred accounts, including employer-based qualified defined benefit and defined contribution plans as well as individual retirement accounts.
The value of the cap would vary from year to year since it’s based on the maximum annual defined benefit dollar amount payable at age 62 on a 100% joint and survivor basis ($265,000 for 2023) and the current interest rates used to calculate minimum lump sum payments from defined benefit plans.
The cap would be about $3.4 million in 2023 for individuals aged 62 or older (a lesser amount for younger taxpayers). If an individual exceeds the cap at the end of the calendar year, no additional retirement plan contributions could be made or defined benefits accrued during the following year. This proposal is ridiculously complex and would be nearly impossible to administer.
To paraphrase General Douglas MacArthur, old revenue raisers never die, they just fade away. But under the current political circumstances, I fully expect to see these retirement savings houses of horrors once again.
Andrew Remo is ARA Director of Federal and State Legislative Affairs.
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