A call to scrap tax breaks for retirement plans and use the savings to shore up Social Security has some in the financial services industry up in arms. But the question is not whether the U.S. retirement savings system is costly, complex, and ineffective at boosting savings. It’s all of those things. The only question is what should replace it.
Retirement policy discussions are usually not the stuff of impassioned debates. This changed recently. Two retirement experts, Andrew Biggs from the center-right American Enterprise Institute, and Alicia Munnell, director of the Center for Retirement Research at Boston College created a stir with their suggestion that Congress end or substantially cut tax preferences for 401(k) and similar retirement savings plans. The U.S. tax code provides massive breaks – an estimated $185 billion in 2020 – to encourage people to save more for their retirement than they otherwise would. But, as Munnell and Biggs note, research has long shown these tax preferences do little to boost retirement savings. So, why, they ask, should the U.S. Treasury keep handing out billions every year in incentives that don’t work? Reactions from the retirement industry, which earns billions in fees servicing 401(k) plans, has been unkind to say the least.
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