You always see the scene in the movies, people who are broke currying for cash and trying to hock everything they can to the pawnbroker. Remember Dan Ackroyd as Louis Winthorpe III with the legendary Bo Diddley as the pawnbroker in the scene from Trading Places?
Pawnbroker: I’ll give you 50 bucks for it.
Louis Winthorpe III: Fifty bucks? No, no, no. This is a Rouchefoucauld. The thinnest water-resistant watch in the world. Singularly unique, sculptured in design, hand-crafted in Switzerland, and water resistant to three atmospheres. This is *the* sports watch of the ’80s. Six thousand, nine hundred and fifty five dollars retail!
Pawnbroker: You got a receipt?
Louis Winthorpe III: Look, it tells time simultaneously in Monte Carlo, Beverly Hills, London, Paris, Rome, and Gstaad.
Pawnbroker: In Philadelphia, it’s worth 50 bucks.
Louis Winthorpe III: Just give me the money.
In a scene reminiscent of Trading Places, our government is trying to curry for cash for all the spending over the last 5 years and they are trying to hock anything of value to pay off these debts. Now trying to raise revenue, Congress is now looking at tinkering with the 401(k) plan.
These proposals may include:
• Capping retirement-plan contributions at $20,000 a year or 20% of compensation, whichever is less—including employer contributions. Currently, the limits are 100% of compensation or $50,000 a year.
• Replacing deductions for retirement savings with an 18% tax credit, deposited directly into an individual’s retirement savings account.
• Accelerating “automatic enrollment” of workers in retirement-savings plans, along with their default savings rate, and automatically increasing workers’ savings rates each year.
• Simplifying the paperwork involved for small employers’ adopting existing types of plans, with the goal of increasing access for more workers.
Before we start writing the obituary for the retirement plan industry, these are just proposals and I’m sure the retirement plan industry will spread some cash to influence the decision makers to kill it. A proposal earlier this year to take away a big tax advantage for inherited IRAs was ditched after the outcry.
Regardless of my political persuasion, I think these are awful proposals that will certainly gut our retirement savings and only increase the retirement crisis we are currently facing thanks to the funding or lack thereof, of Social Security. Eliminating the tax deduction for salary deferrals will certainly cause plan participants to either eliminate or curtail their contributions, studies have shown that this will most likely be the effect.
The proposals are a shortsighted gimmick that raises revenue initially but cuts back on potential revenue later because while retirement savings are tax deferred, they are ultimately taxed unlike the mortgage deduction where the money is deducted and never taxed again. So taxing the money upfront and eliminating retirement savings because of the lowered limits and eliminated deductions will eliminate revenue later because there will be less tax collected because of less retirement savings.