(The Hill) – A retirement bill currently being negotiated in the Senate gives wealthy Americans tax relief by advancing the payment schedule to remain income-neutral in the 10-year budget window, but ultimately adds to the national deficit unless a future Congress raises taxes.
The Senate’s Enhancing American Retirement Now (EARN) Act raises the age at which taxpayers must begin making withdrawals from 72 to 75, allowing them an additional three years of tax-free growth.
Most Americans start living off their retirement accounts well before age 75, so the increased age requirement really only affects the wealthy, who often use their retirement accounts as retirement vehicles. tax-sheltered investment rather than savings to cover the cost of living. in old age.
The bill throws another bone at wealthy taxpayers — and Wall Street fund managers looking after their money — by allowing them to deposit an additional $10,000 a year into their retirement accounts from 60 to 63 year. Setting aside an extra $10,000 a year is something most Americans can’t afford.
To pay for these tax breaks, the law does not increase taxes elsewhere, as it is supposed to. It gets around the problem by allowing retirement plan participants to opt for Roth IRAs instead of traditional ones.
With Roth accounts, taxes are taken when you put money into them rather than when you take them out. This generates revenue within the legal budget window, but means the tax cuts are not actually paid out in the long run.
“These payments are the same as those in the retirement bill passed by the House. It’s a gimmick,” Steven M. Rosenthal, senior fellow at the Tax Policy Center, a left-leaning think tank in Washington, said in an interview. “I’ve seen every gadget in the book, and the Roth IRAs are the worst.”
“This is a blatant use of budget scoring rules,” Rosenthal added. He further lamented that traditional notions of fiscal responsibility these days seem to be beyond the capacity of Democrats and Republicans alike.
“The Republican Party of today is very different from the Republican Party of fiscal conservatism of long ago. Republicans borrow and spend, Democrats tax and spend. But the reality is that tax cuts don’t pay for themselves, and it’s often easier to build bipartisan support around something when you borrow to make it happen than to tax,” he said.
Hiding long-term revenue losses with fanciful accounting may be less troubling to economists when interest rates are at zero, but high inflation in the wake of the pandemic prompted the Fed to start raising rates and to tighten its global monetary policy.
“With inflation well above our long-term target of 2-3% and an extremely tight labor market, we have raised the target range for the federal funds rate at each of our last three meetings, which has resulted in an increase 1.5 percentage points from target. range so far this year,” Federal Reserve Chairman Jerome Powell told Congress this week. “The committee reiterated that it expects continued increases in the target range to be appropriate.”
This could mean that long-term deficit expansion measures, such as Congressional pension plans, will weigh more on taxpayers 10 years from now.
The House version of the Senate retirement bill, known as Secure 2.0, was the second major retirement bill to pass a chamber of Congress in just three years. It received nearly unanimous support and a 414-5 vote, with all Democrats present voting in favor of the bill and only some of the more conservative Republicans, including House Freedom Caucus Chairman Andy Biggs (R-Arizona) , voting against.
Wall Street has come out in favor of the bill since fund managers are paid in fees and more money in retirement accounts means more fees for fund managers.
The American Bankers Association, the National Association for Fixed Annuities, the Insured Retirement Institute and other finance and retirement industry trade groups thanked Senate Finance Committee Chairman Ron Wyden (D-Ore. ) and Ranking Member Mike Crapo (R-Idaho) for Legislation. in a June 21 letter published by the U.S. Chamber of Commerce.
“Talk to the people on the committee, the members of Congress. They don’t think it’s a gimmick, and that’s why they used it. This is a fully paid invoice. It has to be paid to pass — that’s the rule of Congress — and those are the mechanisms they’ve come up with,” said Paul Richman, head of government and political affairs at the Insured Retirement Institute, a group pressure from the pension sector. in an interview.
In their letter to Wyden and Crapo, the lobbies urged speedy passage of the bill, writing that “the Committee’s dedication to Retirement Security is a critical step in finalizing retirement legislation during this Congress.” .
Although aimed at wealthy Americans, the House and Senate pension plans contain provisions for the average household, which brought in about $67,500 in 2020, nearly 3% below the median income of nearly $70,000 in 2019.
These include an expansion of the savers tax credit, which subsidizes retirement account contributions for low- and middle-income people by giving them a 50% government match for contributions up to $2,000.
“That extra $1,000 a year might add a little boost to the account balances of low- and middle-income households, but it would still leave them much less than the new incentives for the wealthy in the bill,” Frank Clemente, leader of the left-leaning advocacy group Americans for Tax Fairness, wrote Wyden in a June 21 letter.
His group also liked that the Senate EARN Act will lead to “worker participation in 401(k) and 403(b) retirement plans.” [by] encourage employers with a tax credit to automatically enroll their workers in pension plans (unless the workers retire), allowing employers to count employees’ student loan repayments for contribution purposes counterpart.
But Clemente wrote that these improvements are “marginal” and only “modestly” help “low- and middle-income people with less secure pensions”.
“The pension system is upside down. It rewards those who don’t need help and gives very little to those who do,” said Rosenthal of the Tax Policy Center. “But of course the retirement industry complex is very, very powerful.”