Too many Americans are saving little to nothing for retirement. According to one study, 45 percent of working-age households "do not have any retirement account assets." Congress could sharply improve the numbers by adopting dynamic scoring of retiree distributions. The move could lead to millions of new accounts, and a fairer sharing of the US's retirement promise.
That promise was the whole idea behind a breakthrough reform over 40 years ago. Let's see where it came up short, and how the country can still make good for those left behind.
In 1974, a far-sighted Congress created a new benefit for workers not covered by traditional pensions. It set up Individual Retirement Accounts (IRAs), combining pre-tax employee contributions with tax-deferred capital gains. A major sweetener, employer contributions, came later with 401(k)s.
The accounts rapidly took hold, but too many companies don't participate: Over half the labor force lacks access to a workplace savings plan. No surprise; it's mainly low- to middle-income employees who go without. Some states are trying to set up their own programs, but federal action would be far more efficient -- and a new rule gives Congress a golden invitation.
Bills that involve fiscal policy are routinely scored to estimate their effect on budgets, revenues and the federal deficit. Dynamic scoring looks beyond the usual 10-year budget window, giving long-term benefits more time to overtake upfront costs. In 2015, Republicans passed a rule requiring dynamic scoring of any bill with a budget impact greater than 0.25 percent of gross domestic product (roughly $45 billion for that year); they want to show the pro-growth results of lower taxes.
Retirement accounts deserve the same dynamic scoring, and the IRS already tracks the figures. According to the latest estimates, retiree distributions totaled over $234 billion in 2014.
That $234 billion is the golden invitation: with those numbers (and bigger ones coming), Congress could increase retirement account enrollment with dynamic scoring; in essence, it could use the billions flowing from existing accounts to erase the cost of adding new ones.
The Joint Committee on Taxation ranks retirement accounts as the second most-expensive tax break in the US. That's more than a little misleading. The retirement break forgoes taxes on contributions, but the Treasury gets the money back through taxable withdrawals. In addition, the Committee's estimates stop at the 10-year window. Dynamic scoring would paint a totally different picture: it would include both higher downstream tax revenues and the multibillions the accounts deliver to the economy. The numbers have never figured in fiscal scoring, and they're set to explode.
The most affluent of the US's 76 million baby boomers began reaching the required minimum distribution age in 2016. That will trigger years of upper-tier withdrawals, stretching into the 2030s and beyond. Separately, a demographic tide is rolling in. The percentage of Americans 65 and over stood at 13.3 percent in 2011; by 2060 it's expected to reach 20 percent. For decades to come, retirement accounts will be spinning off ever-larger hundreds of billions; scores of those billions will be flowing into the US Treasury as tax revenue every year.
Far from a costly tax break, retirement accounts are a gilt-edged investment. They enrich not only individual Americans, but the economy, the safety net and the social fabric. Congress has good reason to spread the wealth: to pass a follow-up reform that makes the workplace accounts available for millions of low- to middle-income workers. By a certain date (2019, say), there's no good reason why retirement accounts can't become a standard worker's right.
The 1974 law that created IRAs was the Employee Retirement Income Security Act. A generation and a half later, Congress should finally offer a path to that security to those who need it most.
There's no better way to keep America's retirement promise.