Retirement Break for the Rich, but Not the Poor

(cross-posted from the NY Times)

Each year at tax time, we talk about which tax breaks to eliminate. But we should also look at how to change the biggest tax breaks so they’re more efficient and equitable. That’s where the money is.

Take tax incentives for retirement savings. Just last year, the federal government spent over $100 billion on tax subsidies to help households save for retirement (in 401(k)s, I.R.A.s, etc.). It’s a worthy goal, but most retirement tax breaks are “upside down”. They subsidize wealthier households, those most likely to save on their own, while offering limited or no benefits to households most in need of support. In fact, 70 percent of the benefits go to the top 20 percent of households, by income, with much of the remainder going to the next 20 percent.

One reason for the uneven distribution of benefits is account access. Half of American workers don’t have access to employer-sponsored retirement accounts so they can’t obtain the associated tax benefits. But we could make retirement savings accessible and automatic. Illinois just passed “Auto-I.R.A.” legislation that provides access to retirement savings accounts for all workers, unless they chose to opt out; and similar legislation is moving forward in about 30 states and in Congress.

Several reforms would make the system more equitable. One would be to change an existing tax benefit, the "saver’s credit," so more people can access it. The saver’s credit is meant to encourage lower-income households to save, but households whose incomes are too low to owe any income tax are effectively ineligible for the credit. Making it refundable would enable millions of lower-income workers, who pay payroll taxes but little or no income tax, to get it as a tax refund. Policymakers could also cap savings in tax-deferred accounts by higher-income earners, as the president has proposed in numerous budgets. Even a modest cap would produce billions of dollars in revenue.

In theory, tax-subsidized retirement accounts aren’t the worst loophole. But the fact that they’re subsidizing savings for high-income households while offering few benefits to lower-income families certainly pushes them toward the top of the chart. The good news is – we can change the system; but first, we need to recognize that it’s not working for most Americans.