The New York Times today unveiled a thoughtful series on the deficit, Debt Reckoning: The Fiscal Deadline in Washington. In "Study Questions Tax Breaks' Effect on Retirement Savings," economic policy reporter Annie Lowrey identifies the lopsided and ineffective tax breaks for retirement accounts as a major contributor:
"Every year, the federal government spends more than $110 billion on tax deductions to encourage Americans to save more for retirement. A new study suggests such provisions may have little effect on the amount Americans save." That's because they go to people who least need the help!
We agree that these tax breaks are ineffective in raising retirement savings and benefit the highest earning tax payers (read SCEPA's analysis of retirement tax expenditures). But instead of eliminating them, we should rearrange retirement tax deductions into a tax credit. This would allow every American to set aside money in a retirement account of his/her own. If we cut the retirement tax expenditure and merely use it to reduce the government debt, we will still face an overwhelming retirement income debt that will result in a retirement crisis (the gap between what Americans need for an adequate retirement and what they have is close to $6 trillion, according to Anthony Webb at Boston College's retirement Research Center).
America's debt crisis has forced Congress to re-evaluate and possibly reform the tax code. They should use this opportunity to restructure the tax code to solve the upcoming retirement crisis.
For further investigation into this topic, below is video of a forward-thinking event hosted by SCEPA and the New America Foundation in 2009 that asked academics and lobbyists to defend and critique three major tax breaks – those for retirement, housing and employee health care. You can also read Lauren Schmitz's analysis of the costs of these tax expenditures at the state level.