US Study Recommends Reform Of Retirement Tax Incentives

by Mike Godfrey, Tax-News.com, Washington

19 December 2013

The Center on Budget and Policy Priorities (CBPP) has issued a paper asserting that the current United States tax incentives for retirement saving are "ripe for reform."

The CBPP noted that, costing USD137bn in 2013 and USD2 trillion over 2014-2023 (according to the Congressional Budget Office), tax incentives for retirement plans, such as pensions, employer-sponsored retirement savings plans, and individual retirement accounts, are one of the largest federal tax expenditures.

However, it considered the tax incentives to be poorly targeted and inefficient in increasing retirement savings in that "the bulk of their benefits go to higher-income households. In 2013, some 66 percent of the benefits of the retirement tax incentives went to the 20 percent of taxpayers with the highest incomes, (who) are likely to save substantial amounts anyway for retirement and other purposes, and to respond to retirement tax incentives primarily by shifting existing assets into tax-preferred accounts rather than by undertaking additional saving."

Meanwhile, it added, "the bottom 20 percent of households receive just 2 percent of the benefits of retirement tax incentives, even though low-income people are the least likely to have savings and the most likely to need tax incentives to save for retirement."

The CBPP therefore concluded that "these subsidies are ripe for reform that can help accomplish two important goals – raising revenue for deficit reduction and tax-reform goals, and improving retirement saving incentives for low- and moderate-income households, the groups with the most people who need to boost their retirement assets."

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