Ending 401(k) Tax Breaks

The Emperor’s New Clothes

A new proposal from the Center for Retirement Research (CRR) suggests eliminating tax advantages for 401(k) plans and other employer-sponsored retirement accounts.

According to the white paper, sponsored by the Center for Retirement Research at Boston College, Social Security Insurance will be insolvent in about a decade. At that point, payroll tax revenue would only cover about 77% of all benefits.

The paper recommends that the estimated $185–189 billion per year in lost federal tax revenue — circa 2020’s estimate, for instance — would be better used to subsidize Social Security's funding shortfall.

As longtime Beltway careerists and the paper’s co-authors Andrew Biggs and Alicia Munnell argue: “The tax expenditure has failed at its broader policy goals of increasing national saving or expanding plan coverage.”

They also extrapolate that the 401(k) and other tax-advantaged retirement accounts, by and large, only benefit wealthy contributors (see this Valentine’s Day X-tweet from Ms. Munnell’s employer).

Source: X, National Institute on Retirement Security

“Therefore,” Biggs and Munnell conclude, “the case is strong for curtailing these tax breaks.”

First things first: “In traditional defined contribution (DC) plans, employees are not taxed either on their own or their employer’s contributions in the current year or on the investment earnings on their balances,” the CRR paper outlines.

“Instead, participants are allowed to defer taxes until benefits are received in retirement, at which time both contributions and investment earnings are taxed as ordinary income. 

“Similarly, participants in traditional defined benefit (DB) pensions are not taxed on the annual increase in the value of their accrued benefits but rather defer paying taxes until they receive benefits in retirement.”

Yes… And? That’s an incentive for saving, correct?

“The overwhelming evidence is that tax‐advantaged accounts significantly increase private savings,” says an article at the Cato Institute.

“Harvard economist Daniel Benjamin,” the article cites, “[estimates] that roughly one‐quarter of 401(k) balances represent new national savings. A second quarter represents tax savings. Combined, Benjamin’s estimates imply that about half of 401(k) balances are new private savings.”

Furthermore, the think tank fires back at Biggs and Munnell’s methodology as “an overconfident misinterpretation of the academic literature that does not acknowledge the broader economic benefits of private saving.

“In their summary of the literature, Biggs and Munnell rely on a study using Danish data,” the article notes. [Emphasis ours.]

“It is unclear if Denmark’s more rigid, government‐mandated retirement system and the observed change in the relative value of different account types provides a useful analogy to the U.S. system or a policy that eliminates retirement accounts altogether.

“In other words, it’s doubtful that the findings in Denmark are generalizable to the United States.” Even so? “The paper’s results confirm that tax‐advantaged accounts can substantially increase personal savings.”

The Cato Institute concludes: “If policymakers are worried about diminished marginal investment incentives, the solution is simple: eliminate contribution limits.”

• As of 2024, the annual contribution limit for 401(k) plans and other defined contribution retirement accounts is $69,000 total when combining both employee and employer contributions. Individuals age 50 and over can save an extra $7,500

• .On the employee side, the 2024 tax-deferral cap is $23,000 or $30,500 for those 50 and older

• “Individual retirement accounts also enable workers to put away up to $7,000 in pretax contributions, or $8,000 for those 50 and up,” says CNBC.

“Only high-income individuals tend to meet those thresholds,” CNBC editorializes.

On the other hand? “Over time, even small increases in private savings can contribute to a larger capital stock, additional labor supply and a bigger economy,” the Cato Institute contends.

As for Biggs and Munnell’s proposal, we repeat something our managing editor Dave Gonigam said in 2016 when discussing another madcap retirement scheme…

“Bad public policy ideas never die: They just get gussied up in new clothes.”

For example, we documented how, in 2017, as the White House and Congress were thrashing out the Trump tax bill, the GOP was talking about “Rothifying” the 401(k) — either eliminating the pre-tax benefits, or slashing the annual contribution limit to only $2,400.

Once again, in 2021, we surmised Biden’s tax scheme would apply a wicked-complex formula to limit the 401(k)’s advantages, especially once savers get into higher tax brackets.

But in the interest of time today, we’ll give the last word to the Cato Institute on this latest bad-policy proposal…

“The balance of the evidence suggests that raiding Americans’ private retirement savings to prop up Social Security would significantly reduce private retirement savings and slow capital accumulation necessary to sustain a growing economy.

“In the case of retirement savings,” the Cato Institute roasts, “the government has clearly demonstrated that private savers are better stewards of their money than Congress.”

A Nasty Month for Homebuilders

One economic number of note: Housing starts dropped like a rock in January — down 14.8% — while permits are down a more modest 1.5%. Year-over-year, however, permits are up 8.6% while housing starts are up less than 1%.

“Potential homebuyers are sensitive to mortgage rate fluctuations while builders continue to face headwinds such as higher construction costs and shortages of buildable lots and skilled labor,” says First American economist Ksenia Potapov.

“The biggest declines in January were in the regions that were hit by the biggest winter storms,” says Bright MLS Chief Economist Lisa Sturtevant. “In the Northeast, new starts were down 20.6% month to month, while starts fell by 30% in the Midwest.”

And the University of Michigan has issued its monthly consumer sentiment survey. This report is nigh-worthless — based on a survey of fewer than 500 people — but nonetheless the Fed pays heed to a portion of the survey dealing with whether folks think inflation will get better or worse.

Today, the expectation is that inflation will run 3% in the next year — up slightly from January’s 2.9%. The survey also asks about inflation five years out: Here, the typical respondent expects a rate of 2.9%, ruler flat from last month.

At the time of writing, the market seems to be taking a breather. The S&P 500 Index is flat at 5,030. The same can be said for the Dow at 38,700. Meanwhile, the tech-heavy Nasdaq has lost about 0.25% to 15,865.

As for commodities, crude is up 1.30% to $79 for a barrel of West Texas Intermediate. Precious metals? Gold is catching a bid: The yellow metal is up 0.45% to $2,013 per ounce, according to Kitco, while silver is up 2.20%, above $23. 

Finally, it’a a tale of two cryptos today: Bitcoin is up 0.40% to $52K, but Ethereum is down almost 2% to $2,775.

Follow-up File: Deep-Sea Mining

“Deep-sea mining is a relatively energy-efficient process,” said Paradigm’s science-and-technology authority Ray Blanco last summer.

“Consider,” he said, “that polymetallic nodules occur above the surface of the ocean floor…

Source: Wikipedia

“These metal-rich rocks litter much of the ocean floor,” said Ray, “making the ‘mining’ process more like retrieval than conventional mining. Another argument in favor of the process? Transportation via ship is far more efficient than any method on land.

“The materials required to produce clean energy solutions simply cannot be mined on land,” he concluded. “If there is a way to extract natural resources from Mother Earth that everyone agrees is safe, ethical, sustainable and worthwhile, then nobody has presented it as of yet.”

Clearly, Ray was onto something…

“Norway has become the first country in the world to move forward with the controversial practice of commercial-scale deep-sea mining,” the BBC says.

Last week, a new bill passed which will expedite exploration for valuable metals used in green technologies — including lithium, scandium and cobalt — that are found in those potato-nodules on the crust of the deep ocean floor.

The Norwegian plan opens up over 280,000 square kilometers of national waters to mining companies, pending further environmental reviews.

Scientists have raised alarms about potential impacts to fragile marine ecosystems. “The move puts the country at odds with the EU and the U.K., which have called for a temporary ban on the practice because of concerns about environmental damage,” the BBC says.

But proponents argue deep-sea mining could provide cleaner sources of essential ingredients for batteries and renewable energy infrastructure.

And with surging demand for EVs and other "green" technologies, Norway aims to balance economic incentives and ecological protections.

“Cold Is Gold” in Tennessee

“There’s a saying in beer sales: Cold is gold,” says Andy Ashby, co-owner of Memphis Made Brewing.

We’ve long followed the sturm und drang of American breweries, both large and small — from Belgium’s raid on Miller High Life to beer-label hijinks during a government shutdown.

So it logically follows that we would feature the latest assault on the beer industry, this time, in Tennessee…

“That would be very detrimental to our brewery and the beer business in general,” Mr. Asby says.

“There’s only a handful of accounts that put our beer on a warm shelf,” says Drew Barton, head brewer at Memphis Made. “It would have a huge impact, huge. Package sales are somewhere around 40–50% of our sales, and 90% of that is cold.”

You know… call me crazy… but instead of targeting the sale of cold beer, perhaps legislators repeal Tennessee’s “Open Container” law — which makes it perfectly legal for passengers in vehicles to consume alcohol.

No wonder one in three fatal car crashes in Tennessee involves driving under the influence…

Golden State: Warm Weather and “Eye Candy”

“When I was of working age, I moved where there were available jobs: New York/New Jersey to Atlanta, then Atlanta to Chicago,” a reader replies to our Big Sort issue Tuesday.

“Once retired, I moved to Mexico for 20 years. Four years ago, I could see that economically it was time for me to return to the USA. I chose California for the weather and, as a widower, for the eye candy along the beaches.

“The blue state policies are unpleasant, yet there is much to enjoy. California highways and health care and elder care are better than anywhere. I have access to nearby military and veteran facilities, and live in a condo on a golf course.

“I likely live within a psychologically secure bubble. My conservative views here are in the minority, but watching wildlife on the fairway from the comfort of my living room is delightful, and hearing and seeing the occasional SpaceX rocket launches adds some excitement.

“The internet provides full access to plenty of good entertainment, and my TradeStation app gives me direct access to every market. I will admit to enjoying the good fortune of a boomer’s benefits for the rest of my days.”

You, sir, sound like a character…

Take care! And enjoy your weekend.

Best regards,

Emily Clancy
Associate editor, Paradigm Pressroom's 5 Bullets