NCPA - National Center for Policy Analysis


December 17, 2008

It is estimated that 401(k) plans cost the government $80 billion in tax revenues each year, with most of the breaks go to the wealthier participants. This has led to calls for a redistribution of tax benefits, says Pamela Villarreal, a senior policy analyst with the National Center for Policy Analysis.

For example, Teresa Ghilarducci of the New School for Social Research recently proposed a plan to let workers trade their current 401(k) plans in for a Guaranteed Retirement Account (GRA).  GRAs would basically replace 401(k)s, says Villarreal. 

Ghilarducci's plan would:

  • Require every worker to put a mandatory 5 percent of after-tax earnings into a GRA (the employer would contribute half of the 5 percent).
  • Require the government to deposit $600 a year into the account of every worker.
  • Pay a monthly amount at retirement, similar to an inflation-indexed annuity, with a guaranteed 3 percent real rate of return on the account balance.

The plan would also eliminate tax-exempt retirement accounts.  As a result, the marginal tax rate on saving would be increased, especially for higher-income households.  This would create a disincentive to save, reducing capital formation, says Villarreal.

Even worse, GRAs are far from personal accounts, explains Villarreal:

  • They do not allow individuals to pick from an array of funds; the money would instead be pooled and invested by the government as it sees fit.
  • The government would have the right to reduce the guaranteed rate of return during economic downturns and could allow workers to deplete their retirement funds when unemployed.
  • The fund would be managed by an independent body, similar to the Thrift Savings Plan for federal employees; Congress has frequently attempted to require the TSP to invest in funds of dubious value.

Source: Pamela Villarreal, "Retirement Account Reforms: Good and Bad," National Center for Policy Analysis, Brief Analysis No. 638, December 17, 2008.

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