Here We Go Again: ‘Out of Whack’ Retirement Incentives, ‘Mega’ IRAs and Retirement 2.0

By Nevin Adams • September 17, 2014 • 0 Comments
Apparently the ghost of Mitt Romney’s IRA continues to haunt Capitol Hill — and, if the chairman of the Senate Finance Committee has his way, retirement savings will be on the tax reform agenda. 

During the 2012 presidential election campaign, the subject of Romney’s $100 million IRA was a hot topic. On Sept. 16, Senate Finance Committee Chairman Ron Wyden (D-Ore.) kicked off the “Retirement 2.0: Updating Savings Policy for the Modern Economy” hearing on Capitol Hill by focusing on the issue of so-called “mega” IRAs.

Drawing on data provided in a new analysis by the Government Accountability Office (GAO) at the request of his committee, Wyden claimed that “incentives for savings in the tax code are not getting to the people who need them,” and that it was “clear that something is out of whack” with a system that he said taxpayers are “subsidizing” to the tune of $140 billion a year. Yet, Wyden said, “millions” are nearing retirement with little or nothing saved.

The GAO report noted that “few” taxpayers had IRAs with more than $5 million. Apparently 9,000 people do, but the vast majority — about 43 million — do not.  

Rather than take the “bait” of Wyden’s provocative introduction, Sen. Orrin Hatch (R-Utah), Ranking Member of the committee, focused his opening statement on the spirit of bipartisanship that he said had long been part of the major pieces of retirement legislation passed by Congress, and that most (Bentsen/Roth; Roth/Breaux; Grassley/Graham; Grassley/Baucus and Hatch/Pryor — or as most of us would think, “Portman/Cardin”) bear the names of a sponsor from each side of the aisle.

Hatch did, however, caution against what he described as a “political strategy by some in Congress to turn pension policy into just another partisan battleground,” saying that he hoped that the day’s discussion would not include “poll-tested slogans like “Upside Down Tax Incentives,” “Bang for the Buck,” “Pension Stripping” or “The System is Rigged” in the absence of substantiating data. “We need to hear facts and serious policy proposals, not political slogans,” Hatch declared. 

For the most part, Hatch got his wish.

Witness Projection Programs

The hearing included testimony from five witnesses (a sixth, former Wall Street Journal reporter Ellen Schultz, was a no-show, apparently a casualty of an Amtrak rail problem that morning) before a strong turnout of the powerful Senate Finance Committee. With Schultz a no-show, and despite the harsh introduction by Wyden, most of the testimony and discussion that followed was positive and supportive of the employer-sponsored retirement system. 

As might be expected, John Bogle talked a lot about excessive fees and the value of index funds, but his proposed solutions for the current system were fairly standard: shore up Social Security, expand access to the employer-based system and restrict leakage. However, Bogle also suggested limiting the participation of high-cost providers and noted the need for a uniform fiduciary standard. Asked about the issue of financial education during the Q&A that followed his prepared remarks, Bogle noted that in school we introduce students to investing concepts via “stock picking contests” — “exactly the wrong message,” he said, noting that he’d start with a compound interest table instead.

ASPPA member Scott Betts, senior vice president of National Benefits Services, highlighted a number of indicators that the current system has been successful, including: 

* About 80% of participants in 401(k) plans make less than $100,000 per year, and 43% of participants in these plans make less than $50,000 per year.
* More than 70% of workers earning from $30,000 to $50,000 participated in employer-sponsored retirement plans when a plan was available, while fewer than 5% of those middle income earners without access to an employer-sponsored plan contributed to an IRA. In other words, middle class workers are 15 times more likely to save for their families’ retirement at work than on their own.

Betts also highlighted a number of provisions in Sen. Hatch’s SAFE Retirement Act (S. 1270) that he noted would address several of the legal obstacles keeping employers, particularly smaller employers, from offering these programs, and described the combination of nondiscrimination tests and contribution limits that makes the 401(k) system more progressive than the progressive income tax structure.

In his testimony, Dr. Brian Reid, Chief Economist at the Investment Company Institute, emphasized a series of points that ASPPA and NAPA have long championed, including the importance of not doing harm to the current system; the fact that the tax preferences for 401(k) plans are a deferral, not an exclusion; and the fact that the tax deferral benefit is equalized across income groups in the context of 401(k) plans.

Dr. Brigitte C. Madrian told the committee that a “survey of the current academic literature” on the subject indicated to her that financial incentives didn’t have much impact on the amount participants saved, but acknowledged that the threshold of the match was more important than the rate of the match. She also stated that the tax code was too complicated to be an incentive, citing as an example her inability to figure out if she was eligible for the Saver’s Credit.

Madrian noted that designs like auto IRAs and multiple employer plans (MEPs) would help; that ways to reduce leakage should be explored; and that, above all, if we wanted to increase participation and increase savings rates, we need to make it easy. She also made an interesting point: that while immediate financial incentives have been proven to be highly effective in motivating worker behavior — things like being given a gift card in return for enrolling in a plan or being eligible for a drawing to win a prize — they are not allowed under ERISA. 

During the Q&A that followed Madrian’s prepared testimony, she explained that many workers are financially illiterate, don’t understand (and thus may not fully appreciate or take advantage of) the complex tax incentives and, worse, may work for employers that don’t offer these programs. Consequently, she said, it is important to incentivize employers to offer retirement plans to their employees.

Dr. Andrew G. Biggs, Resident Scholar at the American Enterprise Institute, declared that the use of the term “crisis” to describe the current situation was an “overblown non-solution to a non-crisis.” Biggs declared that 75% of today’s retirees are “doing well,” and that projections from several research organizations indicate that Gen Xers are likely to have the same retirement experience as Baby Boomers — and that Boomers are having a better retirement than their parents, who ostensibly lived during the “golden age” of pensions. 

Biggs cited a proposal to establish a higher floor for Social Security benefits, set at the poverty line. He also noted that many of the individuals who are not covered by the current private system have a “sporadic” connection to the workplace, and thus wouldn’t be helped by some of the proposals to either shore up or introduce mandates into the current system. 

As is often the case, questions asked by the lawmakers following speakers’ prepared testimony can provide unique insights, not only into the thinking of a particular legislator, but on the issues they think merit congressional action. However, it was a simple comment made by Sen. Wyden toward the end of the hearing that might warrant the most attention by the retirement industry: "Retirement savings are going to be a focus in bipartisan tax reform."  

Though, when it comes, there’s not likely to be anything simple about that.