Tax breaks for retirement plans should benefit more people

The tax law enacted in December 2017 generated much discussion about “tax breaks” – who benefits from them and whether those benefits are distributed fairly. While most people are familiar with tax breaks such as the home mortgage interest deduction, there is less awareness of the tax breaks for retirement plans, and their impact on federal revenues and programs.  

Retirement plan participants benefit from tax breaks, which are officially called “tax expenditures.” The total estimated cost of retirement plan tax expenditures in fiscal year 2017 was between 193 and 207 billion dollars. The tax breaks for retirement
plans are among the largest federal tax expenditures.

The reason for these tax breaks is to encourage saving for retirement. Although most workers earn Social Security benefits, these benefits alone are not enough for a secure retirement.  
 
As a practical matter, all taxpayers pay for the tax breaks for retirement plans. If the government receives less money in taxes, that money is not available to pay for other programs and services. The lost revenue also contributes to the federal deficit.

Although many people benefit from the tax breaks for retirement plans, many others cannot benefit because they don’t have the opportunity to join an employer plan or cannot afford to put aside money for retirement. Only 54% of workers participated in a retirement plan at work in 2017 and 30% of workers did not even have access to a workplace retirement plan.

Moreover, the landscape of retirement plans has shifted from the predominance of pension plans, which benefitted almost everyone in a specific class of workers, to 401(k)-type retirement savings plans that usually only benefit those employees who can afford to make contributions. The benefits are typically greater for those who can afford to contribute the most.  

At the Pension Rights Center we think that using tax incentives as a carrot to encourage employers to set up plans and to encourage employees to contribute to plans is an ingenious concept. But it only makes sense if the system is made fairer so that many more people get the benefits of these tax breaks.

In an October 2017 Report to Congress, “The Nation’s Retirement System: A Comprehensive Re-evaluation is Needed to Better Promote Future Retirement Security,” the Government Accountability Office recommended establishment of an independent commission to study the U.S. retirement system. This may be an idea whose time has come.