Economists Question Value of 401(k)s Amid Hypothetical Government Abolishment

Economists Urge Overhaul of Retirement Savings Tax Subsidies

In January, two economists, representing divergent ideological perspectives, proposed in a research brief that the federal government discontinue subsidizing pre-tax contributions to retirement savings accounts.

They argued that allowing individuals to shield their retirement funds from taxes predominantly benefits the affluent. Redirecting the nearly $200 billion annual loss in tax revenue could bolster the underfunded Social Security program, they suggested.

Their proposal ignited significant discussion, with one social media post garnering over 700,000 views.

Alicia Munnell, a former assistant Treasury secretary under President Clinton, and Andrew Biggs, a senior fellow at the right-leaning American Enterprise Institute, collaborated on the brief. Munnell emphasized, “We do not think that this subsidy, which you can only rationalize if it increases saving…we don’t think it does increase saving very much.”

The economists’ scrutiny of 401(k) plans and Individual Retirement Accounts (IRAs) underscores concerns about the unequal distribution of benefits. Federal data reveal that these tax-favored accounts predominantly benefit wealthier Americans. For instance, households in the top 10% income bracket held a median retirement account balance of $559,000 in 2022, compared to just $39,000 for middle-income households.

Many smaller employers don’t offer 401(k) plans, and even when available, participation rates can be low due to financial constraints or fears of future penalties. Moreover, lower-income individuals often prioritize immediate needs over long-term savings.

Despite their originally intended purpose of encouraging widespread retirement savings, 401(k) plans and IRAs have failed to substantially increase participation rates. While some in the retirement industry vigorously defend these tax-favored accounts, the economists argue for reforming the subsidies to ensure they benefit responsible savers without disproportionately favoring the wealthy.

While the prospect of abolishing tax subsidies remains unlikely, the economists advocate for modifications that promote equitable access to retirement savings while addressing concerns about wealth inequality. Suggestions include capping tax subsidies for high-balance accounts or limiting tax benefits on contributions beyond a certain threshold.

Though consensus on reform is elusive, the economists’ proposal has invigorated discussions about the future of retirement savings policy in the United States.

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