Tax Credits Over Deductions for Retiree Savings Pushed at Panel

Replacing tax deductions with credits for retirement savings would benefit low- and middle-income Americans, federal economic policy expert William Gale told a retirement security forum.

Credits would shift tax benefits from those paying the top tax rates to more modest earners, Gale said today at an event in Washington hosted by the Senate Special Committee on Aging.

The current system of retirement savings is flawed, Gale said, because it delivers the “largest immediate benefits to higher-income individuals in the highest tax brackets.”

Redirecting incentives is particularly important because “the current weakness in the economy actually poses a threat to the retirement system” by putting pressure on families to cut back on savings, said Gale, director of the Retirement Security Project at the non-partisan Brookings Institution.

Gale proposed eliminating tax exclusions for worker and employer contributions to employer-based 401(k)s as well as deductions for contributions to individual retirement accounts. He recommended substituting a tax credit, deposited directly into an employee’s retirement savings account.

A 30 percent credit would be revenue-neutral over 10 years, Gale said. If the government wanted to reap savings for deficit reduction, reducing the credit to 18 percent would yield $458 billion over 10 years for the Treasury, he said.

Gale’s proposal is based on a 2006 paper he co-wrote with Peter Orszag, former director of the Office of Management and Budget, and Jonathan Gruber.

In an op-ed article in Bloomberg News on Sept. 7, Orszag, now vice-chairman of global banking at Citigroup Inc., said research shows that under the current system income deposited by high earning households in tax-preferred accounts, like a 401(k), would likely have been saved anyway.

Encouraging Saving

“To encourage more saving, per dollar tax incentives should be larger at the bottom than at the top,” Orszag wrote.

David John, senior research fellow at the Washington-based Heritage Foundation, which advocates for free enterprise and limited government, said at the event today that private savings proposals like Gale’s are important because even if Social Security were fully funded, it only provides about half of the income Americans need for a comfortable retirement.

“We need to be able to depend at least to some extent on ourselves,” John told the forum. “It is a rough world out there.”

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