Retirement Policy Likely to Change Radically in Near Future
As President Trump and the new Republican-controlled Congress settle in, experts say U.S. retirement policies are likely to change significantly over the next few years.
This is largely because of the new majority’s plans to overhaul the U.S. tax structure and federal budget in ways that could fundamentally change how the tax code treats private-sector retirement plans. Currently, retirement, as a standalone issue, is not a high legislative priority in Washington.
Secondly, because of the drive to simplify and lower income tax rates, tax-favored retirement provisions in the tax code are vulnerable. As one of the top sources of “revenue foregone” by the federal government, ending or reducing current tax breaks for employment-based retirement plans — particularly 401(k) plans — would free up revenue for other things that the new Congress and president want to do, experts said at a recent Employee Benefit Research Institute forum in Washington, D.C. on the topic of “Retirement Policy Directions in 2017 and Beyond.”
Retirement Savings Incentives in the Tax Code are a Target
At the forum, Brian Graff, chief executive officer of the American Retirement Association, said retirement savings incentives in the current tax code are an inevitable target to help finance Republicans’ other priorities.
“They want to do tax reform that’s revenue neutral, they want to lower rates, they want to lower taxes on investments, and they want to lower corporate rates,” Graff said. “To be revenue neutral, the money has to come from someplace else, and historically, we (retirement tax preferences) have been a target to pay for other priorities.”
Graff noted that policymakers in Washington, D.C. are not focused on retirement savings in the same way as those in the retirement sector. Specifically, he cited recent comments by U.S. Rep. Kevin Brady (R-TX), chairman of the tax-writing House Ways and Means Committee, who called for a radical simplification of the federal tax code.
“He mentioned the importance of savings and that Americans aren’t saving enough — but the conversation wasn’t about retirement savings, it wasn’t about saving for health care, it wasn’t about saving for education. It was about reducing the taxes on capital gains,” Graff said. “They’re not talking about retirement — they’re talking about the way to increase savings is by reducing the taxes on investments.”
And because more than 80 percent of capital gains tax incentives go to households with over $250,000 in adjusted gross income, Graff said, “I don’t think there’s much of a debate about who gets the incentives for reductions in capital gains, and that’s the problem: We’re not even viewed as savings in that prism.”
Randy Hardock, a partner in the benefits law firm of Davis & Harman, a former staffer with the Senate Finance Committee, and a former official in the U.S. Treasury Department, agreed that existing tax-code preferences for retirement programs are at high risk in the new Congress and with the Trump administration.
“Quite honestly, it is incomprehensible to me that Congress will not go after retirement plans in some way in tax reform, even if it’s just trying to shift from traditional retirement savings to Roth-like vehicles, because it raises money (for the federal budget),” Hardock said. “Over the short term, it raises money generally from higher-income people. But they are going to move in that area and there are ideas out there now.”
Retirement Industry Should Prepare to Act Quickly
Hardock predicted that this will happen quickly in the early days of the Trump administration, especially since Republicans now have full control of the federal government and will want to act fast. The retirement industry should be prepared to also act quickly if they hope to add provisions to the legislation when it begins to move.
“We do have an opportunity, things are happening,” Hardock said. “You’ve got to get on the train when it’s leaving the station.”
For more information about changes in federal retirement policies, please contact us.
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