Reducing Pre-Tax Contribution Limit

President-elect Trump has proposed many ambitious plans to reduce taxes and extend the TCJA’s 2017 tax reforms.  With only a small majority in Congress, most expect that the GOP will attempt to push their agenda through using the reconciliation process, which would not require Democrats to vote in favor of the legislation.  That process has strict revenue constraints, which has led to various ideas on how to offset the cost of extending the 2017 tax cuts.  One of those proposals would reduce the amount that an individual can contribute to a retirement plan on a pre-tax basis.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about proposals to reduce the pre-tax retirement contribution limits to increase revenue.

Below is a summary of the debate that ensued between the two professors.

Their Votes:





Their Reasons:

Byrnes: In this current economic environment, it's much more important to prioritize extending the 2017 tax cuts.  Most American families are still struggling under the weight of high prices and the impact of inflation.  By reducing the pre-tax retirement contribution limits even slightly, Congress can generate the revenue necessary to get the Trump administration's tax package signed into law via the reconciliation process without significantly increasing the national debt.

Bloink: We should continue to do everything possible to encourage taxpayers to save the most amount possible for their retirements—this proposal would steer ordinary Americans in the exact opposite direction.  Suggesting that the pre-tax retirement contribution limits could be reduced without consequences for the retirement income security of millions of American retirement investors is absurd.  The immediate tax benefit is a key factor in ordinary Americans’ decision to fund private retirement plans.  Eliminating that incentive could mean we see millions of Americans relying much more heavily on Social Security for retirement income.

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Byrnes: Americans will continue to have robust savings options even if the pre-tax retirement contribution limits are reduced.  In fact, they may even have a stronger incentive to diversify their portfolios and explore additional valuable options when it comes to retirement savings.  Roth accounts are incredibly valuable, and a reduction in pre-tax limits could spur a renewed focus on the value of Roth accounts.

Bloink: The pre-tax appeal of a current tax reduction is perhaps the strongest motivation to fund a private retirement account.  Reducing that benefit to pay for yet another tax break for the wealthiest Americans is only going to serve to exacerbate the impending retirement savings crisis in this country.  Social Security is already under extreme stress—and we’ve yet to take steps to fix that looming problem.  This proposal would only add fuel to the fire and take this country in the wrong direction.

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Byrnes: American taxpayers are not going to forego retirement savings simply because the pre-tax contribution limits are reduced.  There are too many strong motivations to save—receiving employer matching contributions, for one.  We have to weigh the possible costs against the strong benefit of extending the 2017 tax cuts so that ordinary Americans aren’t faced with hugely increased tax bills when 2026 rolls around.

Bloink: The government’s focus should be on increasing the current value of a retirement savings contribution—and thus giving taxpayers stronger motivation to responsibly save to ensure a comfortable future.  Americans are naturally going to be more inclined to save if there is an immediate benefit, and while Roth accounts do provide a valuable future tax savings, the promise of a tax break decades down the road is rarely sufficient.