Private retirement plans such as 401(k)s and IRAs play a crucial role in helping Americans build their retirement savings independently of Social Security benefits.
While private plans don’t directly affect Social Security payments, they could indirectly impact them.
According to a paper from the Center for Retirement Research at Boston College, eliminating tax preferences in 401(k)s and other employer-sponsored retirement programs could potentially address Social Security’s impending funding shortfall.
The shortfall pertains to the Old Age and Survivors Insurance (OASI) Trust Fund, which is projected to deplete within the next decade. Once depleted, Social Security would rely solely on payroll taxes, covering only about 77% of current benefits.
The proposed solution involves repealing tax preferences on employer-sponsored retirement plans and reallocating the resulting revenue to bridge Social Security’s long-term funding gap.
The paper highlights estimates from the U.S. Treasury Department, indicating that tax preferences for retirement plans and IRAs reduced federal income taxes and revenue by approximately $185 billion to $189 billion in 2020.
The authors of the paper suggest that reducing tax expenditures for retirement plans could offer a viable solution to address other fiscal challenges, such as Social Security’s financing shortfall.
While private retirement plans don’t directly affect Social Security payments, ending their tax advantages could help sustain Social Security’s funding for a longer period, potentially averting benefit cuts when the OASI fund is depleted.
Proponents of ending tax preferences for employer-sponsored plans argue that such plans primarily benefit the wealthy. Data from the Survey of Consumer Finances shows that, as of 2022, the median retirement account for households in the top 10% by income held $559,000, with 93% of those households having retirement plans.
The disparity in retirement savings is stark: while middle-income Americans have a median retirement account of $39,000, nearly half of them have no retirement savings at all. For lower-income Americans, the situation is even more challenging, with few having access to retirement plans.
Despite these disparities, tax-advantaged retirement programs have strong support, particularly from the financial services and employee benefits sectors.
Craig Copeland, from the Employee Benefit Research Institute, highlights that 401(k)s are not solely beneficial to the wealthy. Many middle-class individuals rely on them as their primary source of savings outside of homeownership.
Rather than eliminating tax benefits altogether, some experts propose modifying them. This approach aims to enable middle-class Americans to save for retirement while addressing unfair tax advantages enjoyed by the wealthy.
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