At Work

No savings, no retirement 

Today, 60 percent of U.S. households have no money in a 401(k) or similar retirement account, and the benefits of 401(k)s are skewed toward the wealthiest Americans, a recent report by the Government Accountability Office found.


Do you believe the above statement? 

The first part appears to be true. Saving for anything beyond tomorrow’s latte appears absent from many Americans DNA. 

But what about the “benefits of 401(k)s are skewed toward the wealthiest Americans” part? 

Well, duh🙄. 

Isn’t it obvious that any tax-favored program will provide a greater benefit to the people who pay the most in taxes (also meaning higher skilled jobs)?  

The other side of that equation is that since distributions are taxed as ordinary income, the “wealthiest” Americans also pay a greater portion of their retirement income in taxes. So, greater tax benefit when saving & and greater tax liability when using your money in retirement. 

Such qualified plans also contain restrictions that limit the benefits for higher compensated workers while most 401k plans are designed so that virtually any worker can fully benefit from an employer matching contributions. 

Of course, these facts are rarely reported in retirement stories. And other vehicles to save for retirement are often ignored. What happened to myRA specifically designed for the worker without a 401k and lower income?

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2 replies »

  1. Wow, imagine that, most of the tax preferences, what they call tax expenditures, go to people who pay taxes!!! And, imagine that, the tax expenditures are higher for those people who have higher marginal income tax rates. Remember, folks, the government calls these preferences for savings “expenditures”. Yes, Virginia, it means that the federal government believe that all you earn and all you own belongs to them, and when they let you keep a little more of it, it is an “expenditure” of federal monies.

    People listen to sound bites and go goofy:
    First, take Bernie’s millionaires and billionaires. Note that no one is paid a billion a year – so, first up, recognize that Bernie has wealth envy … not so much “income inequality”
    Second, take Bernie’s concerns about “income inequality”, which must focus on the handful of Americans earning $1MM or more, because if he focused on the top 1%, the 99% crap, we would be talking about a US household income > $450,000. Don’t sound like millionaires and billionaires to me.
    Third, look at government programs designed to counter income inequality, such as the earned income tax credit. Bernie wants more and expanded federal government programs. Talked about one screwed up system. Last year, the IRS paid out $15.6Billion (yes Billion) in earned income tax credits, 23.8% of all earned income tax credits, to people who were INELIGIBLE, people who were not entitled to a penny of earned income tax credit!!!!! See: https://www.yahoo.com/news/outraged-over-23-billion-wrongful-081500609.html?ref=gs
    Fourth, there are two other similar programs, the American Opportunity Tax Credit and the Additional Child Tax Credit, where another $7.5 Billion was paid out to INELIGIBLES last year!!!!!
    https://www.treasury.gov/tigta/auditreports/2016reports/201640036fr.pdf

    But, really, it is just a bunch of Democratic (and many times Republican) crap designed to raise taxes to fund entitlements to buy votes. If they measured the tax preferences (or tax expenditures) for retirement savings to include revenues both inside AND outside the 10 year budget window, you would find that there is NO tax preference involved in 401(k) plans – at least not for traditional, pre-tax employee deferrals.

    Before we get to the data on budget calculations, don’t forget that the whole point of tax preferences for retirement savings is to encourage individual taxpayers, and their employers, to prepare for retirement so that all taxpayers and society in general are not left with the entire burden of old age Americans. Just think of the societal costs if every older American was poor enough to qualify for Medicaid, and other old age programs based on poverty. Remember, altogether, after expansion as part of health reform, Medicaid already finances 16% of total personal health spending in the U.S.

    In a 2015 report, using the most recent data we had available on Medicaid (2011!!!!! they are far behind which itself is another government ploy), Kaiser Foundation confirmed that, as in the past, the average cost and number covered under Medicaid vary significantly based on status – 10.2MM disabled – average of $16,371; 6.1MM elderly – average of $13,643; 18.4MM adults – average of $3,248 and 32.6MM children – average of $2,558. You gotta know that, even if only accounting for Health Reform, as more and more states adopt Medicaid expansion, we will add another 5 – 10 million adults and children to Medicaid by 2020.

    Back to the issue at hand, the tax preferences, er tax expenditures on behalf of Americans saving for retirement. Say we drop the tax expenditures for retirement savings which reduces the number who save, and we end up doubling the number of retirees receiving Medicaid, that would add $83 Billion to the taxpayer burden (in 2011 numbers), each and every year, now and forever more, increasing over time!!!! And, of course, once someone who is retired is on Medicaid, he/she NEVER, EVER comes off until death. Because almost half of all medical spending occurs in the last six months of life, you are talking about a massive burden on society and taxpayers. Studies show, for the average individual, that only a fifth of all lifetime expenditures occur during the first half of life (79.6 percent of expenditures remaining after age 40), while nearly half (48.6 percent) accrues after age 65. As you might guess, that number EXCEEDS the guesstimate for annual 401(k) tax preferences inside the 10 year budget window. See: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1361028/

    Finally, in terms of concentrating tax preferences among the millionaires and billionaires, the maximum tax deferred 401k contribution is $18,000 a year. If you earn a million a year or more, that is 1.8% of pay, allowing you to defer (not avoid) maybe $7,200 in federal income taxes, or .7% of pay. Someone at the median household income in America, $52,000 a year, could also defer $18,000, but the tax deferral would be 15%, or $2,700. Hence, the GAO’s conclusion – the double pronged difference of a higher percentage of high income Americans saving, coupled with a higher marginal tax rate. Remember that retirement savings in a 401(k) are not tax preferred with regard to Medicare and Social Security funding. But studies also show that most high income taxpayers have marginal federal income tax rates in retirement that are as high or higher than while employed. Some of this comes from the income based surcharges for Medicare Part B and Medicare Part D, as well as taxation of social security benefits.

    So, the GAO (and most of the federal government) LIES when it excludes revenues received outside of the 10 year budget window in its conclusion … the rich retirees among us, will be shouldering just as much of the burden to finance government, if not more, for funding Social Security and medicare entitlements once retired, as they did today, while employed.

    Liked by 1 person

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