PSCA: "Tax Reform Panel Proposals Will Reduce Retirement Savings"
CHICAGO, IL, November 3, 2005 -- The Profit Sharing/401k Council of America (PSCA) applauds the President's Advisory Panel on Federal Tax Reform for its efforts to make the tax code simpler, fairer, and more conductive to economic growth. The recommendations will provide an excellent springboard for further discussions on this important topic. However, the proposals as presented will reduce retirement savings.
The report contains several recommendations for new individual savings plans, the taxation of dividends, and employer-provided salary deferral plans, commonly referred to as 401k plans. Without doubt, these provisions are intended to encourage savings and to help American workers prepare for their long-anticipated retirements. Unfortunately, we believe that unintended consequences will interfere with these laudable goals.
PSCA believes that any proposal affecting retirement savings should address four questions: Will overall retirement savings increase? How will the at-risk population of lower paid workers be affected? Will leakage of retirement savings increase? Will non-savers be induced to save? While we are confident the panel members believe their proposals will result in affirmative responses to these questions, we must disagree.
The high annual contribution limits in the proposed Save for Retirement and Save for Family Accounts, and the elimination of the taxation of domestic dividend income and 75 percent exclusion of tax on capital gains on equities, will provide the same or even better benefits than are provided to most participants in employer-provided plans. In this new environment, many employers, particularly small business owners, will decide not to provide a retirement plan for their employees and to take advantage of the proposed changes for their own retirement savings. This will result in lower retirement savings because moderate- and lower-income employees will make smaller – or no – contributions to the new savings accounts than they and their employers would have made to their employer-based plans. Other employees will redirect their retirement savings to the more flexible Save for Family Accounts and subsequently use their accumulations for non-retirement purposes. To the extent that some employers will offer the new Save at Work plans, it may be more difficult to pass the nondiscrimination tests, even as changed in the proposal, because many employees offered a Save at Work Plan will choose instead to save in other plans or in other savings products.
"The proposed changes significantly erode the tax code incentives that encourage employers to accept the fiduciary obligation and expense that come with offering a retirement plan," PSCA president David Wray said. "The current approach links the availability of tax benefits for decision makers and better off workers with the retirement savings of lower paid employees. This linkage requires that employers incentivize lower paid workers to save for retirement by using expensive matching contributions as well as conducting aggressive educational campaigns." Fewer Americans will enjoy a financially secure retirement if this employer-employee partnership is discontinued.
PSCA looks forward to working with the Administration and Congress as this important effort progresses. With adjustments, the proposal can expand opportunities for all savers and still preserve the tax treatment incentives – relative to other savings programs – for employer-provided plans that have created today's broad investor class and enhanced retirement savings for millions of American workers.
About the Profit Sharing/401k Council of America
The Profit Sharing/401k Council of America (PSCA), a national non-profit association of 1,200 companies and their 4 million employees, advocates increased retirement security through profit sharing, 401k and related defined contribution programs to federal policymakers and makes practical assistance with profit sharing and 401k plan design, administration, investment, compliance and communication available to its members. PSCA, established in 1947, is based on the principle that “defined contribution partnership in the workplace fits today's reality.” PSCA's services are tailored to meet the needs of both large and small companies with members ranging in size from Fortune 100 firms to small, entrepreneurial businesses.
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