Promoting retirement savings: an investment in our future
Each year, millions of Americans carefully save their hard-earned dollars in retirement savings accounts like 401(k)s or IRAs with dreams of a secure retirement. The federal tax code provides them with important incentives to do so.Under existing tax rules, individuals are allowed to contribute to these accounts on a pre-tax basis – up to certain limits – and can defer tax on the earnings while they accumulate. Not only do these tax incentives help assure a secure retirement, but the increased savings also provide the capital necessary to stimulate economic growth and job creation.Much of the “cost” of retirement tax incentives to the federal government is recouped over time, because taxes on retirement savings are merely deferred until these accounts are drawn on for retirement. The moment these tax-deferred nest eggs are tapped for retirement income, they are subject to taxation as ordinary income.There has been much discussion in Washington about reforming our federal tax code and reducing the federal deficit. It is imperative that Congress carefully examine the ultimate costs of policy options that might be presented as “reasonable solutions,” but in reality, could have devastating long-term unintended consequences.Reducing tax incentives for retirement savings falls into that category. Many small-business owners offer retirement plans to their employees because it is a convenient add-on to their own retirement accounts, but reducing retirement incentives may act as a major disincentive to these same small-business owners to offer such plans, leaving millions of additional low and moderate income workers with no access to a workplace plan. Reforming our tax code and restoring America’s fiscal health are important goals, but we should not be tempted by “reforms” that will have negative repercussions for years to come.Incentives for saving – whether in 401(k) plans, IRAs or a variety of other private retirement plans – encourage individual financial self-sufficiency. The Center for Retirement Research at Boston College reports that the percentage of pre-retirement income replaced by Social Security stood at nearly 39 percent in 2004. By 2030, it is expected to drop to about 29 percent.At the same time, the demographics aren’t forgiving. Every day, some 7,000 baby boomers hit retirement age, and over the next 20 years, the number of Americans over 65 will increase dramatically – from 40 million to over 70 million.And people are living longer. According to the National Center for Health Statistics, the average life expectancy rose from 69.7 years in 1960 to 77.9 years in 2007. The increasing longevity of Americans will require adequate financial resources to meet post-retirement needs.Given these realities, policymakers in Washington should focus on policies that make it easier – not harder – to save for retirement.A financially secure retirement is a dream for all Americans, and it is one that the federal government should encourage. Not only will individuals benefit, but the nation as a whole will benefit in the long run. A tax code that encourages saving for the future is an investment that will pay enormous dividends in our future.James T. Brett is president and CEO of The New England Council.