OpEd—Sometimes Numbers Do Lie
Another top 10 list of popular tax breaks (Tax Breaks Exceed $1 Trillion: Report, Wall Street Journal March 24) drawn from a recent Congressional Research Service (CRS) report has reignited discussion on tax reform. The problem is the CRS numbers are based on bad math which inflates the “cost” for 401(k) contributions—threatening to derail the best vehicle Americans bank on for retirement—their 401(k) plan.
What’s wrong with the analysis? The CRS report lists “exclusions for employer pensions,” including 401(k) contributions as the second most expensive tax break, but 401(k) contributions aren’t “exclusions,” they are a “deferral.” Unlike the health insurance and mortgage interest deductions which are permanent, deductions for 401(k) plan contributions are only temporary because the money comes back to the government when the funds are distributed and taxed as retirement income.
The analysis used by the Congressional scorekeeper for federal tax provisions, the U.S. Congress Joint Committee on Taxation (JCT), which the CRS report relied on ignores the fact that money contributed to 401(k) plans (and investment returns) are taxed on the way out. The reason? Our budget is principally a cash basis system with a 10-year budget window. Since retirement savings are not all distributed within a set 10 year window—the scoring disproportionately reflects the tax cost of the contribution without offsetting the tax revenue upon distribution.
In fact, the real present value “cost” of 401(k) contributions is less than half of the amount reported by JCT, according to a study published by economists who previously worked for JCT. (Retirement Savings and Tax Expenditure Estimates, May 2011)
As we try to make sense of our nation’s budget, let’s start by making sure our analysis is based on numbers that make sense.
–Brian H. Graff
Executive Director / CEO
The American Society of Pension Professionals & Actuaries (ASPPA)
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