Few view the blunt sequestration cuts set to begin on Friday as ideal policy, yet budget hawks worry that non-action on the deficit would leave in place a growing debt dynamic that has fostered only economic stagnation.
To that end, the Brookings Institution's Hamilton Project convened a roundtable discussion of budget experts Tuesday in Washington to consider "innovative, pragmatic proposals for lowering the deficit by reducing expenditures or raising revenues."
While the 15 proposals range from military procurement reform to restructuring Medicare, one of them at least drives to the heart of financial advisors' work with retirement clients. Proposal No. 6 by Brookings fellow Karen Dynan looks to save $40 billion over 10 years by limiting the subsidy of tax-advantaged retirement savings plans such as 401(k)'s.
The essence of Dynan's idea is that affluent investors would save for retirement anyway, without taxpayer incentives; consequently, the primary plank of her four-tiered proposal is to cap retirement savings-related deductions at 28%.
The Brookings scholar writes:
"The Tax Policy Center has estimated that entirely eliminating the tax preference for new contributions to defined contribution plans would raise about $30 billion from households in the top 5% of the income distribution, which is very roughly the fraction of households that would be affected by a deduction rollback."
Because she proposes a 28% rate cap, the value to taxpayers would total about $7.5 billion per year. Since Dynan's other policy plans are aimed at broadening credits and establishing programs for low-income Americans—which would cost some $3.5 billion annually—her proposal over all would generate $4 billion in annual savings, or $40 billion in deficit reduction over 10 years.
Unsurprisingly in Washington, where tweaks in tax policy rouses rapid reactions from those affected, Brian H. Graff, executive Director/CEO of The American Society of Pension Professionals & Actuaries (ASPPA), swiftly called Dynan's proposal a double tax on 401(k) contributions that would induce business owners to shut down their plans and thereby reduce low-income retirement savings.
