Grab Your Pitchforks, Your 401(k) May Need Defending From Congress [View all]

[question everything]

By Jason Zweig

The lucky participants in one of the best retirement plans around are coming after yours with a meat cleaver. In the early stages of negotiating tax overhauls, Congress is already considering whether to reduce the benefits of contributing to a 401(k) and similar retirement plans, even as U.S. representatives and senators bask in the safety of the pension system that taxpayers fund for federal employees.

Alongside several million U.S. government workers, members of Congress participate in the Federal Employees Retirement System, which wraps their current savings and future pensions in a cushion of comfort that most American workers can only dream of.

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In 2015, the average taxpayer-funded annual pension received by recently retired members of Congress was $41,316. A representative or senator retiring in 2014 after 30 years in Congress would earn an annuity of roughly $104,600 to $130,500, according to the Congressional Research Service.

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Fewer than one in 10 corporate retirement plans match 5% of employees’ contributions dollar for dollar, according to the Plan Sponsor Council of America. Every member of Congress gets that match, funded by taxpayers. Even if a member of Congress won’t set aside any of his or her own money, the public automatically contributes an amount equaling 1% of that legislator’s salary to the federal retirement fund. Nearly all members of Congress earn $174,000 annually.

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At a meeting with members of the Senate Banking Committee this month, Gary Cohn, the director of the White House National Economic Council, discussed ideas that would remove pretax benefits from retirement accounts, including 401(k)s, and shift them to after-tax benefits, according to people familiar with the discussions. It wasn’t clear how seriously the administration is evaluating any specific proposal, these people said.

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That’s because the money you contribute to 401(k)s and several other types of retirement plans isn’t subject to current income tax. Nor are your future earnings on those accounts, until you take them out to live on in retirement, when your withdrawals will be taxed as ordinary income. If your retirement dollars were treated, instead, like contributions to a Roth individual retirement account or Roth 401(k), they would be taxed before you put them in. You could ultimately withdraw the money tax-free in retirement, but the incentive of getting an upfront tax break would be gone.

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It’s hard for most people to save for a goal that glimmers faintly decades in the future. Take away the tax incentive, and many savers might no longer see the point of even trying. Fully 39% of Americans don’t feel very confident in their ability to fund a comfortable retirement, according to a recent survey. It’s safe to say none of those worried folks are members of Congress. Instead of penalizing retirement saving, lawmakers should be making it easier, perhaps even mandatory, as it is for members of Congress. At a bare minimum, if Congress is going to hack away some of the tax advantages of private retirement plans, it should make matching cuts to the cushy federal system.

If you have a pitchfork in your garage, keep it handy. Your 401(k) might need defending.

https://www.wsj.com/articles/grab-your-pitchforks-your-401-k-may-need-defending-from-congress-1492804191