Saving For Retirement

Saving for retirement could get more expensive for most Americans because of the budget deficit. Lawmakers are looking into reducing specific tax breaks as they begin to grapple with the U.S. tax code while wrestling with an ever-larger pile of U.S. debt. The push by some Republican lawmakers to reduce the top tax rate from 35% to 25% has brought the subject of "loopholes" to the forefront. Some Democrats are asking how the reduction in federal revenue will be paid for if most of the 200 credits currently allowed are not eliminated. The rhetoric continues to state that the tax preference for retirement savings costs Washington more than $200 billion a year. I initially had a strong visceral reaction against the reduction or elimination of the preferential treatment for retirement savings.

A change in the tax incentives related to saving for retirement would affect millions of Americans, including the middle class. Judy Miller, director of retirement policy at the American Society of Pension Professionals and Actuaries, said in testimony Tuesday that about 70% of workers earning $30,000 to $50,000 a year also benefit from the current tax code relative to retirement savings.

These folks would not benefit from a reduction in the top rate from 35% to 25%. Other bracket reductions would become necessary to protect these millions of folks who are trying to put together a retirement package.

According to the Washington Post, "Democrats nonetheless pounced, arguing that Camp's goal of lowering the top tax rate to 25 percent from the current 35 percent without increasing budget deficits would require lawmakers to eliminate virtually every break in the tax code."

The debate rages. Do we lower the code and shut down tax incentives that impact millions, or do we leave the higher rate in place along with all the special treatment? What is the reasonable, as opposed to the visceral, reaction?

In my opinion, we should slowly shut down the tax provisions that favor specific activity, investments, and industries and immediately lower the tax rates for all classes of income earners over a period of no less than five years. A slow phase out of mortgage interest rate deductions and retirement savings (to name two) would be no more detrimental to those industries than was the loss of the deduction for interest payments on credit cards decades ago. That industry did not need indirect government subsidy and neither does the mortgage industry. We are similarly self-incented to prepare for our retirement and do not need the government to further incent our actions.

The lower tax rates would provide for more money in the private sector, which can be counted on to boost economic activity and therefore increase government revenues over time. The nation ends up with a simplified system that provides adequate resources for the functioning of government.