Gang of Six Deficit Reduction Plan

[goldtpa]

Bipartisan support is building for a deficit reduction plan created by a group of six Senators ("Gang of Six"). President Obama supports it. Some key Senators also support it. In order to address the debt ceiling and the deficit, the Gang of Six want to ""Reform, not eliminate, tax expenditures for health, charitable giving, homeownership, and retirement."

According to some reports, 401k plan contribution limit may be lowered to bring in more revenue. Has anyone else heard about this? Are lower limits on the table for 401k plans?

[ETA Consulting LLC]

It's all speculation, but everything is on the table. I heard the same reports. Brian Graff (with ASPPA) wrote a highlight regarding this. If Vegas is taking bets, mine is on lower limits.

Again, just speculating.

[masteff]

It's not limited to the Gang of Six plan.

I'd suspect the annual additions limit is a major target: "much of the academic literature shows that higher income people are moving investments they would have made anyway [in taxable accounts] to a tax-preferred account".

The links in this article are as useful as the article itself: http://blogs.reuters.com/reuters-money/201...401k-tax-break/ (Lots of articles out there but I chose the Reuters one as the least likely to be seen as biased.)

[goldtpa]

masteff, I did see that article previsously. Its funny because I remember having to do 401k calcs on HCEs to see whether they exceeded the 15% limitation many many moons ago. Now I may have to do it again.

[mbozek]

Bipartisan support is building for a deficit reduction plan created by a group of six Senators ("Gang of Six"). President Obama supports it. Some key Senators also support it. In order to address the debt ceiling and the deficit, the Gang of Six want to ""Reform, not eliminate, tax expenditures for health, charitable giving, homeownership, and retirement."

According to some reports, 401k plan contribution limit may be lowered to bring in more revenue. Has anyone else heard about this? Are lower limits on the table for 401k plans?

The likelihood of Senate initiated proposals on tax reform being enacted at this time is virtually zero because all tax legislation must originate in the House which has a completely diffrerent agenda, e.g., no tax hikes of any substance, only spending reductions. For those of you who were not around the last time Congress attempted tax reform, the attempt on tax reform began in 1982 when the Treasury Dept published a study recommending a reduction in tax deductions in return for lower marginal rates. It took 4 years before Congress approved the tax reform act of 1986 which reduced 14 tax rates to just two -15 and 28% by eliminating personal interest deductions, creating a 7.5% threshold for medical expense deductions, reduced 401k contributions from 30k to 7.5k, capped covered comp for retirement plans at 250k, eliminated universal IRA deductions and reduced deductible contributions to DB plans to make tax reform revenue neutral. Given the current state of retirement savings I dont see why deductions for retirement savings should be reduced unless tax rates for the middle class are reduced by 40% or more, e.g., 25% to 15%, 15% to 9%, etc to encourage contributions to a Roth account because of the small amount of taxes that would be paid in return for tax free income in retirement. The senate proposal mentions reducing the current 6 brackets to 3 with a max rate of 23% but does not have much detail. It would take years to approve a tax reform plan.

The elephant in the tax reform room that is being ignored in the congressional debate is how to solve the AMT problem. Under current law the AMT patch which exempts the middle class from AMT expires at the end of this year and higher taxes due to AMT will return in an election year. Extending the patch for one year costs about 70B in lost revenue which jacks up the amount needed to be borrowed. A permanent fix to eliminate the AMT tax on the middle class would cost about 1.5T+ because it involves forgoing 10 years of revenue from the AMT as taxable income increases. Until Congress can agree on a permanent fix to substitute a revenue source for the 1.5T+ in AMT revenue that would not be collected from the middle class over the next 10 years there ain't going to be any serious tax reform, only window dressing. A logical fix to offset the loss of revenue from the AMT is eliminate the deduction for state and local taxes.

[ETA Consulting LLC]

You know what's interesting (since we're on the subject); the RMDs. It seems that RMDs were started around 1987 in order to generate taxable income, the idea being that tax deferrals were allowed for so long, that there has to be sometime to actually receive the money and pay taxes. During 2000's, budgetary surpluses enable Congress to say (for qualified plans) "hey, if your still employed and you're not a 5% owner (i.e. rank and file...), you can delay distribution until you retire.

At some point, you want to say, 'hey, lets just go back in time and leave the RMD rules unchanged'. I'm just saying.... It's interesting how Retirement Plan policy is always looped in to the need for revenue. I predict this type of stuff will be continuing to happen 30 years from now; not that there's anything wrong with that.

[masteff]

My favorite piece of cannon fodder in Bush Jr's budgets was his univeral retirement savings account. It would have replaced IRAs and qualified DC plans w/ a single account that greatly reduced paperwork/administration. A single bucket for all tax-deferred savings. If they're going to put a serious cap on contributions, then something like this would finally work.

And I'm torn on what % of comp is a reasonable limit. If you don't bail out Social Security, then a higher % is fairer to people really trying to set aside for themselves. But let's be honest: the only people who can afford to defer 100% of comp are people who have either income or assets to spare. 20% is too low, 100% is too high, so what do you do?

[GMK]

so what do you do?

I recall reading somewhere that the ultimate answer is 42. Mighta been a different question, though.

ETK - Good point, althought the phrase "budgetary surpluses" might mislead some, since the federal debt has continued upward every year since 1957. But they get good spin when they ignore off-budget spending.

http://www.treasurydirect.gov/govt/reports...bt/histdebt.htm

[mbozek]

You know what's interesting (since we're on the subject); the RMDs. It seems that RMDs were started around 1987 in order to generate taxable income, the idea being that tax deferrals were allowed for so long, that there has to be sometime to actually receive the money and pay taxes. During 2000's, budgetary surpluses enable Congress to say (for qualified plans) "hey, if your still employed and you're not a 5% owner (i.e. rank and file...), you can delay distribution until you retire.

At some point, you want to say, 'hey, lets just go back in time and leave the RMD rules unchanged'. I'm just saying.... It's interesting how Retirement Plan policy is always looped in to the need for revenue. I predict this type of stuff will be continuing to happen 30 years from now; not that there's anything wrong with that.

The reason that Congress likes to play with RMD commencement dates for qualified plans is that the amount of revenue loss attributable to the pension plan deduction is the third highest after employer deduction for health insurance and the mortgage interest deduction. The way it works is that the Joint committee on taxation determines the amount of revenue lost due to allowing deductions for plan contributions and subtracts the amount of retirement distributions that are included in income in the same tax year. This net number is the revenue loss for allowing deductions for plan contributions. In 1982 Congress needed more revenue to offset the tax cuts enacted in 1981 and mandating MRDs at 70 1/2 for employees of Q plans was an easy choice because it was already required for IRAs and HR-10 plans. So it was justified as a matter of tax equity. In 1996 mandatroy RMDs at 70 1/2 were repealed along with the 10% penalty tax on taxable distributions above 160k because the Republicans controlled Congress and wanted to reduce Gov spending. The flip side to the revenue loss for plan contributions is the Roth conversion option which provides for an immediate gain in tax revenue because Roth distributions in future years are not included for revenue loss.

[ETA Consulting LLC]

Mbozek,

Based on your insight, I have one 'personal' question; are you going to take advantage of the catch-up this year?

[mbozek]

My favorite piece of cannon fodder in Bush Jr's budgets was his univeral retirement savings account. It would have replaced IRAs and qualified DC plans w/ a single account that greatly reduced paperwork/administration. A single bucket for all tax-deferred savings. If they're going to put a serious cap on contributions, then something like this would finally work.

And I'm torn on what % of comp is a reasonable limit. If you don't bail out Social Security, then a higher % is fairer to people really trying to set aside for themselves. But let's be honest: the only people who can afford to defer 100% of comp are people who have either income or assets to spare. 20% is too low, 100% is too high, so what do you do?

What do you mean by bailing out SS? SS has separate funding source from FICA taxes and the first tier income tax on SS benefits for 33% of SS beneficaries which are the dedicated sources for paying benefits. Despite what ignorant commentators want you to believe, because SS is an on budget item has nothing to do with with the current deficit because SS is not allowed to borrow and has no debt. SS has about 2.6T in assets invested in treasury securites which will provide for payment of 100% of SS benefits until 2037. After 37 the FICA tax/income tax will pay for 77% of all benefits. The most inexpensive way to raise revenue as boomers retire is to gradually raise the ceiling on FICA wages to about 160k over 10 years so that 90% of all wages will be taxed. This would only affect the top 7% of all workers.

The real Q is why is SS even in the federal budget? Before 68 or 69 SS was off budget like the PBGC. When the cost of fighting the Vietnam war got out of control LBJ didnt want to raise taxes so he brought SS onto the federal budget because it was running a surplus - more FICA tax was being collected than was being paid out as benefits. SS masked the federal deficit because its surplus assets were considered tax revenue. By the way the govt did a similar financial sleigh of hand to raise revenue with Fanny Mae which was gov owned since 1938. In 1970 the feds spun off Fanny Mae as a public company and collected the revenue from the IPO to pay for the VN war. This worked so well that a few years later the fed gov created freddie mac and did another IPO to raise revenue. As of 2011 US taxpayers have contributed 150B to both companies to prevent them from defaulting on the mortgage securities they have guaranteed. Total loss to be guaranteed by taxpayers is estimated be north of 300B when they are wound down.

[Tom Poje]

so its going to be "when worlds collide"

the current regs require an adjustment to the limits based on the CPI-U index.

the last 2 months were values of 225.964 and 225.722

if the average is 226.700 for July - Aug -Sept. that not a great jump - another increase in gas prices would do that.

if so, the 415 limit would jump to 51,000 next year.

you have to love the way Congress will gripe people aren't saving enough for reitrement.

If they cut back on things, e.g. limit the HCE to say 9% of comp, then all those plans participants are receiving 5% will drop to 3%, so people will have even less for retirement.

guess the govt will spend even more money in the future bailing people out. what else is new.

[mbozek]

so its going to be "when worlds collide"

the current regs require an adjustment to the limits based on the CPI-U index.

the last 2 months were values of 225.964 and 225.722

if the average is 226.700 for July - Aug -Sept. that not a great jump - another increase in gas prices would do that.

if so, the 415 limit would jump to 51,000 next year.

you have to love the way Congress will gripe people aren't saving enough for reitrement.

If they cut back on things, e.g. limit the HCE to say 9% of comp, then all those plans participants are receiving 5% will drop to 3%, so people will have even less for retirement.

guess the govt will spend even more money in the future bailing people out. what else is new.

Quick fix to raise revenue would be to suspend all COLA provisions for retirement plans effective Dec 31, 2011. The legislation would take about 2 sentences.

[masteff]

I'm sure we all know the analogy of the three legged stool... the three legs of retirement income are employer plans, social security and personal savings. The Social Security leg is already wobbling; in 2036 the trust runs out and SS revenues are projected to only cover 77% of benefits. If they implement too severe limits on contributions to employer plans, then we'll have two weak legs out of three. Frankly, I'm saving every spare buck I can because when the stool collapses, I'll need that third leg as a crutch.

[K2retire]

I'm sure we all know the analogy of the three legged stool... the three legs of retirement income are employer plans, social security and personal savings. The Social Security leg is already wobbling; in 2036 the trust runs out and SS revenues are projected to only cover 77% of benefits. If they implement too severe limits on contributions to employer plans, then we'll have two weak legs out of three. Frankly, I'm saving every spare buck I can because when the stool collapses, I'll need that third leg as a crutch.

According to the popular press the third leg of personal savings is non-existant for most Americans. So by "government logic" killing employer plans and Social Security will level the wobbling stool again.