An Obamacare-sized Prescription for a Retirement Crisis Misdiagnosis

By Ray Harmon • July 24, 2014 • 0 Comments
In a piece published in The New York Times on Tuesday, July 22, Gene B. Sperling, former Director of the Economic Council under the Office of White House Policy for President Obama, put on a white lab coat and diagnosed the tax incentive system for private retirement savings with a serious illness by cherrypicking data points to paint his desired picture. It’s no surprise that during Sperling’s time working for Obama, the President borrowed his favorite line and called the system “upside-down.” I criticized the President then for that misdiagnosis and I’ll criticize “Doctor” Sperling now for it too. 

Non-discrimination Rules

This is no “upside down” system. Retirement plan benefits offered by employers are legally required to be made available to all eligible employees, regardless of their position in the company. Non-discrimination rules ensure that employers must make meaningful retirement plan contributions for non-highly compensated employees in order to make meaningful contributions for highly compensated employees. 

Do these non-discrimination rules work? Sperling may be surprised to know that in 2012, approximately 71% of all tax-deferred contributions for defined contribution plans went to middle class families earning under $150,000 (see “Distributional Analysis and Pension Tax Provisions"). Among those middle class workers, the lion’s share of the tax benefit went to workers earning less than $50,000. How’s that for “upside down”?

Tax Deferrals, Not Expenditures

And you’ll notice I used the word “tax-deferred.” Sperling attempts to shock his readers with statistics about massive government spending on retirement plans for the rich, but the “$137 billion in tax benefits” he mentions are tax dollars that will be paid into the system at a later date (when participants begin to pay taxes on the money they receive from their retirement plans). These are not expenditures, they’re deferrals. 

He complains that “three times more went to the top 10% of taxpayers than to the bottom 60 percent.” Even if he’s right, which he’s not, this would mean that the top 10 percent of taxpayers will be paying substantially more in income taxes later on when they collect their retirement benefits than the bottom 60% of taxpayers. 

Sounds pretty right-side up to me.

Access

Sperling doesn’t understand the deferral distinction or nondiscrimination testing, or maybe he does, but it doesn’t support his narrative. So, he shifts instead to individual tax deductions for savings, which is just sleight of hand. He also frames his argument that only the wealthy have access to savings solely in terms of being able to “max out,” hoping the reader will ignore the fact that of course higher-income Americans have an easier time socking away the full $17,500 per year! 

He doesn’t point out that more than 78% of full-time American workers have access to workplace retirement plans like the 401(k). Participation in employer-sponsored DC plans is heavily weighted toward the middle class, with 80% of participants earning less than $100,000 a year. Instead, Sperling only mentions IRAs when discussing the middle class.

Prognosis: Nuke the Patient?

All of this obfuscation conveniently segues to “the good doctor’s” suggestion that we “Obamacare” the retirement system. “A government-funded universal 401(k) would give lower- and moderate-income Americans a dollar-for-dollar matching credit for up to $4,000 saved annually per household.” He suggests this match would be in addition to existing employer matches and also available for certain IRAs, skipping through a field of daisies where optimism reigns and employers aren’t newly disincentivized to continue offering private plans. He envisions smiling employers providing automatic payroll deductions into the new government plan (presumably in addition to plans they may already offer) and, with rainbows shooting out of his ears, he posits that “to allow for vigorous competition in the private sector,” the government could set requirements for “low fees, transparency and safety.”

Surely that last part won’t raise any flags for any of you. Weeeeeeee!

Look, Obamacare has been the law for four years now and just this week we saw two major competing legal decisions in the same day about some of its most important practical framework. Healthcare and retirement aren’t exactly fluff issues — these are third rails. “Sperling, M.D.” here wants to solve an access problem for low-income workers that is more a function of the realities of the labor market than the retirement system itself. And he doesn’t even get to a real problem: many participants aren’t saving enough in plans that would otherwise work quite well for them if they did.

Let’s start with simple improvements. Don’t tell the patient he needs an entirely new body or he’ll die!

Ray Harmon, Esq., is ASPPA's Government Affairs Counsel.