11.23.2012 0

Keep Retirement Savings Accounts off the fiscal cliff discussions

Photo courtesy of Department of Treasury

By Rick Manning — Fiscal cliff discussions are going to cause Congress to look at the entire tax code for areas where loopholes can be closed and deductions tightened, causing lobbyists to be in hyperdrive during this normally quiet time in Washington, D.C.

Scrambling to protect and make the case for their favorite tax deduction or spending program will be how official D.C. spends the Christmas season.

One of the sure to be discussed items is Mitt Romney’s campaign idea to limit deductions to a relatively low threshold and leaving the tax rates the same.

This sleight of hand would allow the politicians to keep promises to not raise tax revenues while significantly increasing the tax burden on those who use these deductions for real estate taxes, mortgage interest payments, charitable and medical expenses to name but a few.

Currently, taxpayers can set aside up to $17,000 in a retirement account without paying taxes on it until it is withdrawn during retirement.

This provision allows workers and small business owners to defer taxes on money they save for retirement until they are older, and more likely to be in a lower tax bracket.  It also is becoming an important leg of future generation’s retirement planning as defined benefit pensions become more and more rare.

However, with more than nine trillion dollars invested in tax deferred retirement accounts, these retirement savings have become to some in Congress an almost irresistible pot of money with proposals floated in the past couple of years to replace the savings with government annuities among other things.

The truth is that with social security’s stability under question, Medicare in trouble, and many private and public employee pensions underfunded and in danger of not meeting their responsibilities, it would be dangerous and irresponsible for Congress to do anything that discouraged saving money today to be withdrawn later during retirement.

What those who view the retirement savings deductions as ripe for the picking seem to forget is that taxes will be paid on every one of those dollars.  The only difference is that the taxes will be paid later in life when they are likely to be at a lower rate than during the saver’s peak earning years.

To put our nation’s retirement savings problem into perspective, according to a 2012 survey conducted by Insured Retirement Institute, more boomers (42 percent, up six percentage points) expect to rely on defined-contribution plans such as 401(k)s as a major source of retirement income.

If Congress should be doing anything related to the retirement savings deduction, they should be making it an even more attractive option, particularly for young people who benefit most from saving early as those savings balloon in value over time.

Everything will be on the table as Congress deals with the fiscal cliff during this lame duck session of Congress, let’s hope in their short-term zeal for increasing how much each of us pays Uncle Sam, they don’t kill the goose that laid the golden retirement egg by messing with America’s incentive to save more for their retirement.  That would be foolish, which makes it very possible when it comes to decision making out of Washington, D.C.

Rick Manning is director of communications for Americans for Limited Government.

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