March 23, 2015

Comments on the Administration’s Proposals for Retirement Policy

Mark J. Warshawsky

Former Senior Research Fellow
Summary

In early February the Treasury Department released its green book explanation of the Obama administration’s fiscal 2016 revenue proposals. Taken as a whole, the proposals would significantly increase taxes ($1.7 trillion over 10 years) and budget outlays ($122 billion over 10 years), move the burden of taxes substantially toward upper income households, redistribute resources toward lower-income households, and increase the complexity of the tax system. In this article, I offer critical comments on the main revenue proposals for retirement, an area that I have addressed in prior Tax Notes articles.

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In early February the Treasury Department released its green book explanation of the Obama administration’s fiscal 2016 revenue proposals.Taken as a whole, the proposals would significantly increase taxes ($1.7 trillion over 10 years) and budget outlays ($122 billion over 10 years), move the burden of taxes substantially toward upper income households, redistribute resources toward lower-income households, and increase the complexity of the tax system. In this article, I offer critical comments on the main revenue proposals for retirement, an area that I have addressed in prior Tax Notes articles.

Require Automatic IRAs
Current law has several tax-preferred, employer sponsored retirement savings programs for various types of employers: large, small, private, nonprofit, and public. Small employers can get a temporary, three-year business tax credit for start-up costs for retirement plans. Individuals who lack access to an employer plan may make tax-deductible contributions to IRAs.

In the belief that retirement preparedness is inadequate, particularly for low-wage workers at small employers, the administration is proposing that all employers that have more than 10 employees and do not sponsor a retirement plan be required to offer workers an automatic IRA option, under which regular contributions would be made to an IRA through payroll deductions. The administration would also increase the small employer tax credit for expenses of new retirement plans and create a modest small employer tax credit for the automatic IRA. 

The green book description implies that all employees would be included in the automatic IRA, including those under age 18, nonresident aliens, and new hires. It is unclear whether part-time employees would also be included. The green book says that the employer would be responsible for providing employees a standard notice and election form and that the default employee contribution rate would be 3 percent of compensation, up to current-law IRA dollar limits, paid to a Roth IRA. At the same time, the green book says that employees and not employers would be responsible for determining IRA eligibility. The apparent contradiction between an employer obligation for notice to employees and the employee self-determination for IRA eligibility is not explained. 

The employer could choose the IRA trustee, allow for employee designation of the IRA vendor, or forward collected funds to a savings vehicle (‘‘standard, low-cost investment alternatives’’) specified by statute or regulation. This last choice for the employer, presumably the default, is left quite vague in the green book, but others have proposed using the federal employee Thrift Savings Plan or creating a new federal program. Indeed, because almost all these IRAs would be very small and difficult to administer, at least initially, it is hard to imagine that employers and employees would find any private-sector IRA vendors interested in this money-losing business. The federal government, needing to make a considerable administrative investment in creating a system of retirement accounts (not unlike what was required for the federal health insurance exchange), would perforce step in. Perhaps the Obama administration has the Social Security Administration or the IRS in mind for this responsibility or has simply not thought the proposal through.

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